Institutional investors are increasingly turning to exchange-traded funds (ETFs) for both routine portfolio functions and as a means of obtaining long-term strategic investment exposures, according to new research from Greenwich Associates.
Greenwich reports that, back in 2011, less than 15% of U.S. institutions were using ETFs in their portfolios. That share is now up to 21%. And, certain types of investors are particularly heavy users, it finds. For example, 40% of U.S. endowments employ ETFs in their portfolios, it notes, as do one third of large public defined-benefit pension funds (those with at least $5 billion in assets) and roughly 25% of the largest corporate defined-benefit funds.
While ETFs still represent a small percentage of total U.S. institutional assets, some institutions have begun building sizeable ETF allocations, it reports. For instance, it notes that 46% of institutional ETF users participating in the study allocate 10% or more of their total assets to ETFs, and almost 30% report ETF allocations of between 10% and 25%, with 20% making even greater allocations.
Greewnich says that the results of the study suggest that ETFs will continue to gain momentum in the coming year. Among institutions currently employing ETFs in their portfolios, nearly half say they expect to expand use in the next year, it says, with one third of institutions expecting to grow allocations by 1%-10%, and nearly 15% planning to increase by 10% or more.
“What we’re seeing is a broadening of ETF use,” says Greenwich Associates consultant Andrew McCollum. “Institutions are finding that ETFs are an effective tool for implementing their portfolio strategies and obtaining core exposures, while at the same time they are continuing their use for the tactical applications in which many investors were first introduced to ETFs.”
Greenwich says that the iShares products, which are provided by BlackRock (the sponsor of the research) are the most popular ETF provider for institutions. It reports that approximately 90% of the institutions employing ETFs use iShares, followed by Vanguard (68%) and State Street/SPDRs (63%). And, 83% of the institutions name iShares as their top ETF provider by assets.
“iShares is cited most frequently by institutions as being the top provider in terms of ETF liquidity, broad product offerings, tight index tracking and high-quality client service. iShares and Vanguard are named as providing the best value for the management fees,” it notes.