Greenwich Associates’ most recent annual study of the U.S. investment management market found ETF use among U.S. pension funds, endowments, and foundations has grown to about 14%. While this might seem like a modest share, institutions actually represent roughly half the assets invested in ETFs in the United States according to recent industry estimates, Greenwich said in a press release.
A Greenwich Market Pulse to survey among 43 plan sponsors and 27 money managers found almost 55% of institutions currently employing ETFs expect their usage of the product to increase in the next three years, including nearly 20% that expect the amount of assets dedicated to ETFs to grow by 5-10% in that period. Approximately 65% of money managers expect to be devoting more assets to ETFs in the next 12 months, compared with half of plan sponsors.
About 20% of plan sponsors expect to reduce their use of ETFs.
Nearly 30% of institutions that do not use ETFs say they lack familiarity with the product.The results revealed that iShares/BlackRock is the most widely used provider of ETFs among U.S. institutions, but most institutions that employ ETFs use more than one provider. Eighty-nine percent of institutional ETF users obtain ETFs from iShares/BlackRock, whereas 60% use SPDRs/ State Street and 51% use Vanguard.
How ETFs are Used
Almost half the institutional users in the Greenwich Associates annual study say they employ ETFs for what they consider “tactical” tasks related to the management of their portfolios. Approximately 20% of institutional ETF users say they employ the funds to implement “strategic or long-term” investment decisions, and an equal share report that they use ETFs for both tactical and strategic purposes.
“In many cases, institutions would rather use index funds or futures in implementing a specific strategy or idea, but a number of funds are discovering that ETFs can sometimes provide a more flexible and efficient solution,” said Greenwich Associates consultant Jay Bennett, in a press release.
Meanwhile, the Market Pulse Survey results show that plan sponsors most commonly use ETFs for two purposes: making tactical adjustments to portfolios and gaining temporary market exposure for assets while transitioning from one external manager to another. Twenty-eight percent of plan sponsors employing ETFs use them to obtain passive investment exposures as part of core-satellite investment strategies, and almost a quarter use them for more general portfolio completion.
Greenwich said a study participant representing a university endowment explained how his fund uses ETFs for both short-term and tactical purposes such as manager transitions and implementing investment ideas, and to gain longer-term exposures in certain asset classes. “For emerging markets, ETFs are used to gain target allocations while an active strategy and managers are implemented and hired respectively,” he said, according to the press release. “In the commodity/inflation hedge/real asset allocation we have exposure to gold through an ETF. It’s easier than buying bullion.”
The most common use of ETFs among money managers is cash equitization, or the process of gaining rapid exposure to an asset class. Investment managers participating in the survey say they use ETFs to gain market exposure both for incoming assets and assets waiting for distribution.
Money managers that use ETFs also commonly use them in making general “tactical adjustments” to portfolios. Approximately 30% of money managers that employ ETFs use them for rebalancing and a comparable share uses them for transition management.About 20% of money managers employing ETFs use them to obtain exposures for core-satellite strategies and about one quarter report using ETFs for broad portfolio completion. One quarter of money managers are also utilizing ETFs to implement macro overlays.