Faced with increased regulatory burdens and higher capital reserve requirements, some financial institutions are turning to exchange traded products as replacements for pricier derivatives instruments.
Institutional investors have historically favored swaps and futures for broad equity benchmark exposure, but “the growing popularity and declining cost for certain exchange-traded products has allowed ETPs to challenge other instruments in ease of use and total cost of ownership,” reports Ari Weinberg for Pensions & Investments.
Institutional investors, including endowments, pensions and sovereign wealth funds, have been embracing ETFs as lower cost alternative to futures and swaps. Earlier this year, analysis from Bank of America Merrill Lynch noted that long-term investors looking for $100 million worth of S&P 500 exposure would save $250,000 in annual fees by opting for ETF exposure rather than futures.
In a recent note, BNP Paribas sounded a similar tone, saying “To avoid potentially elevated futures costs (and cost volatility), our analysis finds that investors not seeking levered exposure may consider ETFs as a suitable alternative to maintain a long position in the underlying S&P 500 index,” reports Weinberg for Pensions & Investments.
The SPDR S&P 500 ETF (NYSEArca: SPY), the world’s largest ETF, charges 0.0945% per year, or less $9.50 per $10,000 invested. [Hedge Funds Love These ETFs]
A similar scenario has emerged in Europe where futures contracts have also become more expensive.
“The cost of holding a Eurostoxx 50 future, for example, has climbed from an average of 0.07% of the contract value since 1998, to an average of 0.45% over the last year,” reported Juliet Samuel for the Wall Street Journal, citing BlackRock (NYSE: BLK) data, earlier this month.
BlackRock, parent company of iShares, the world’s largest ETF issuer, is looking to expand its footprint in the European ETF market by convincing traders to drop more expensive derivatives products for ETFs. [iShares Looks to Expand in Europe]
The move to ETFs over derivatives comes as part of a broader increase in ETF usage by institutional investors. Earlier this year, a study conducted by Greenwich Associates and sponsored by BlackRock said 46% of institutional ETF investors surveyed allocate 10% or more of total assets to ETFs with 47% saying they expect to boost ETF usage over the next year.
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of SPY.