Evidence continues to mount that institutional investors are increasingly embracing exchange traded funds and are doing so for a variety of reasons.
When comparing 2013 survey data to previous years, 88% of survey respondents reported using ETFs in 2013, compared to 70% in 2010, according to fresh data from BlackRock’s (NYSE: BLK) iShares unit, the world’s largest ETF issuer.
BlackRock surveyed over 1,400 institutional clients, including pensions, foundations and endowments; asset managers, consultants, insurers, and registered investment advisors, finding that institutional investors are now using ETFs for myriad reasons. [ETF use on the Rise Among Institutions]
Those reasons include use of ETFs as core portfolio solutions as well as more tactical approaches. Additionally, ETFs have gained traction with institutions as risk management and rebalancing tools.
“As more and more institutions become more familiar and comfortable with ETFs, their usage typically evolves from tactical to core allocations and then expands to more uses such as risk management and portfolio rebalancing,” said Daniel Gamba, Head of iShares Americas Institutional Business at BlackRock, said in a statement. “We believe the momentum of ETFs usage will continue as institutional investors take full advantage of the product’s flexibility.”
Earlier this year, Greenwich Associates said 47% of U.S. endowments use ETFs, as do nearly a quarter of corporate and public pension funds with more than $5 billion in assets under management. [ETF Sponsors Push for Increased Institutional Usage]
Dispelling the notion that large investors are overly concerned about perceived liquidity issues with ETFs, the data suggest liquidity is one of the primary reasons institutions have rapidly warmed to ETFs.
“Institutions across the board have found ETFs to be helpful as a liquidity overlay strategy, whereby they use ETFs that mirror their portfolio allocations with the added benefit of being able to source ETF liquidity for spending needs. The greater value placed in ETFs; transparency likely reflects the broader trend of increasing regulatory demands on institutions for more detailed disclosure,” said Gamba.
Institutional use of ETFs is also growing across asset classes. Although U.S. and foreign equity-based ETFs remain the primary ETF stomping grounds for institutional investors, usage of global bond, commodities and REIT ETFs, among others, is on the rise.
ETF usage is widespread across asset classes. Over the past year, there has been growth in all categories. Domestic and international equity ETFs continued to be the most commonly utilized and domestic fixed income ETFs ranked third. Year-over-year survey results show increased use of fixed income ETFs. Between 2012 and 2013 domestic ETF usage increased from 37% to 48% and international fixed income ETFs grew from 17% to 28% of respondents, according to BlackRock.
Chart Courtesy: BlackRock
ETF Trends editorial team contributed to this post.