Institutional investors are drawn to ETFs mostly for the financial products’ low fees, liquidity and ease of trading, according to a recent report.

“This price competitiveness helps when comparing ETFs to separate accounts and collective investment trusts,” Onur Erzan, a partner at McKinsey & Co., said in the report.

The “battle of the basis points” is concentrated among the biggest ETF sponsors such as Vanguard, BlackRock and State Street Global Advisors. The big three providers control about 84% of the ETF market, reports Ari Weinberg for Pensions & Investments. [ETF Fee War: The High Cost of Low Price]

Institutional investors are in focus as ETF providers try and gain business, as about 15% of them have never used these funds in their strategy. Two years ago the number was about 30%, so it is evident there is room for growth. Investors that are slow to use ETFs have been focused on index funds that track both domestic and international stocks with lots of liquidity. [Fidelity Fires Back in Ongoing ETF Fee War]

“ETF management fees are converging toward those of index funds,”Anthony Christodoulou, principal at WorldTrack, London said. “The total cost of ownership, including trading flexibility, may well have already surpassed them,” he adds. [Are Investors Loyal to an ETF’s Index?]

Most of the ETF providers have shifted the focus from product development to superior product management. This month, Invesco PowerShares announced they would close up 13 funds by march 7, 2013, a move that has caught the attention of institutional investors.

“Every time a provider leaves the market, institutions become more hesitant,”Alex Papazian, senior analyst at Cerulli Associates, said in the article.

Publicized poor trade executions and ongoing market structure debates still expose the vulnerabilities of ETFs, which trade on secondary markets and in primary markets through authorized participants, reports Weinberg. The larger investment customers are going to want an improved trading experience, with plenty of liquidity and sound trading practices before they jump into the business.

Tisha Guerrero contributed to this article.

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