An increasing number of institutional investors are looking to exchange traded funds as easy-to-use active investment tools to construct, maintain and adjust a diversified portfolio in changing market conditions.
According to a recent Greenwich Associates survey of 187 institutional investors between October 2016 and January 2017, an increasing number of institutional investors are allocating a larger portfolio of assets into ETFs.
“Institutional assets are flowing into exchange-traded funds (ETFs) as U.S. institutions integrate them into essential portfolio functions ranging from risk management and liquidity enhancement to the generation of income and yield. As such, ETFs appear to be on track to eventually becoming as common in institutional portfolios as stocks, bonds and derivatives,” according to Greenwich Associates.
Currently, only about one in five U.S. institutions invest in ETFs, but those that hold ETFs have multiple years’ experience investing in the funds. The institutions incorporate ETFs into their portfolios as tools for obtaining strategic investment exposures, and they often include ETFs alongside their stock, bond and derivatives holdings.
Moreover, institutions are capitalizing on ETF’s many positive characteristics, like liquidity, ease of use and quick market access to garner exposure to a broad and expanding range of portfolio applications.
As of the end of 2016, institutional investors held an average 21% of total assets in ETFs, compared to 19% in 2015, and allocations are expected to continue to grow in 2017. About 47% of equity ETF investors and 38% of bond ETF investors anticipate an increase in their allocations to ETFs in the year ahead as well.