Exchange-traded funds represent just a small portion of the portfolios of corporate and public pensions, endowments, foundations and asset managers, but a growing number of these institutions are using the funds for key functions and plan to increase their use of them, a survey found.
Institutional investors already account for about half of the assets invested in ETFs, but 48% of asset management firms in the Greenwich Associates survey and 33% of institutional funds said they expected to increase their allocations to ETFs by 2013.
Greenwich Associates interviewed 45 U.S. institutional funds, including corporate and public pensions and endowments, and 25 large asset management firms, that manage $7.5 trillion in total.
Of the asset managers participating in the survey, 75% manage more than $20 billion and a majority of the participating institutional funds have assets of more than $500 million under management.
The survey was conducted between February and April.
Slightly more than half of the asset management firms and half of the institutional funds indicating they expect to boost allocations to ETFs said that they expect increases of 5% or more.
None of the asset management firms and fewer than one in 10 of the institutional funds that were using ETFs said that they planned to cut their allocations over the next two years.
“ETFs are by no means a sizable portion of their overall portfolios, but they are being used for very important purposes,” mostly tactical, said Andrew McCollum, a consultant with Greenwich Associates.
About 30% of the 25 large U.S. asset management firms interviewed indicated they had ETF holdings of $1 billion or more. Approximately 60% of institutional funds and 20% of asset managers interviewed indicated they had $100 million or less invested in ETFs.
Three-quarters of asset managers and half of the institutional funds participating in the study indicated they use ETFs as a way to ensure they can easily convert to cash when needed or for interim beta.
“If we have a fund with inflows, we may buy an ETF before we decide to invest in an underlying area,” said a head trader at an asset management firm with more than $250 billion in assets under management.
Sixty-three percent of institutional funds and 45% of asset managers indicated they use ETFs during transitions, parking the cash in a passive ETF, for example, after firing one active manager and before selecting another.
Forty-five percent of institutional funds and 40% of asset managers in the study indicated they use ETFs as part of their regular rebalancing procedures.
But the institutional funds and asset managers are also employing ETFs for more strategic purposes, such as hedging. Thirty percent of asset managers and one in 10 institutional funds said they use ETFs in hedging programs.
“The purpose of ETFs for us is to hedge against catastrophic or unanticipated events,” said a survey participant from a $450 million cultural endowment. “The financial crisis has taught us a hard lesson that markets can be extremely volatile. As a hedge against future volatility, we have invested in a gold ETF to make sure we don’t get caught off guard again.”
A small but growing group of investors use ETFs as a liquidity sleeve in their portfolios, Greenwich found.
As would be expected for tactical uses, 40% of asset managers interviewed said they typically hold ETF investments for one to six months, and 40% said they typically hold the vehicles for less than one month.
About 25% of institutional funds said they typically hold ETFs for one to six months on average, 25% typically hold them for seven to 12 months and slightly more than a third hold them for a year or more on average.
