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"This is really a continuation of a trend we've been seeing develop for several years now," said
As in last year's study, half of institutions say that their use of ETFs is strategic in nature, in part attributable to the wider and more diverse ETF product set. This is further evidenced by the growing use of fixed-income ETFs by institutions, who are realizing the benefits of the funds in terms of liquidity and cost transparency in an often-difficult-to-access bond marketplace.
Fixed Income Drives ETF Growth
While institutional investors most widely use ETFs in equity portfolios; in the study, 80% use the funds for domestic equity and 85% use them for U.S. equity exposure, this year's study revealed an increasing use of the funds for fixed income allocations. In fact, half of the institutions participating employ ETFs in fixed income, and more than 20% of those using bond ETFs began doing so less than two years ago. Among asset managers, 57% are now using ETFs in fixed income - up from only 45% just one year ago.
The most frequently cited benefits for institutions: ease of use and ease of access, as well as the high liquidity ETFs offer. In a low-yield environment, institutional investors are seeking new sources of yield and looking for better and more efficient ways to access the asset class in a shifting interest-rate environment. Coupled with their heavy usage of passive index strategies, institutions are increasingly turning to ETFs to achieve those efficiencies. In fact, more than a quarter of institutions now using ETFs in fixed income plan to increase allocations to bond ETFs in the coming year.
Remarkably, more institutions are using ETFs to gain exposure to similarly illiquid or hard-to-access asset classes. According to the study, 38% deploy ETFs in commodities and 27% use the funds in REITs.
From Tactical Tools to Strategic Elements
ETFs have long been used by institutional investors as tactical tools in manager transitions, portfolio rebalancing or cash equitization. Those remain important uses, as about two-thirds of institutional ETF users say they deploy ETFs to make "tactical adjustments" to portfolios. However, half of the institutions in the study say their use of ETFs is mainly strategic. Two-thirds of this group use ETFs to obtain passive exposures in the "core" components of core/satellite strategies, while other common strategic applications include portfolio completion, hedging and liquidity sleeves.
"As institutions become more familiar with the benefits and the range of ETFs available, they are also figuring out better ways to put the funds to use beyond tactical adjustments," said Walker. "One proof point for the increasing strategic deployment of ETFs is that more institutions are beginning to hold them for longer periods of time."
According to the study, asset managers holding ETFs longer than two years grew to 31% up from 24%.
While the uses of ETFs vary, institutional investors seem to agree on the most important criteria for ETF selection: liquidity and trading volume. More than three-quarters cited liquidity/trading volume as an important factor in selecting a fund, while 83% said they are concerned about the liquidity of funds in which they invest. The second most important criteria overall was cost, but asset managers are far more concerned with expenses than institutional funds are: 60% of asset managers cite cost as an important consideration, compared with just 17% of institutional funds.
Between April and
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About iShares ETFs
The iShares business is a global product leader in exchange traded funds with over 600 funds globally across equities, fixed income and commodities, which trade on 20 exchanges worldwide. The iShares funds are bought and sold like common stocks on securities exchanges. The iShares funds are attractive to many individual and institutional investors and financial intermediaries because of their relative low cost, tax efficiency and trading flexibility. Investors can purchase and sell securities through any brokerage firm, financial advisor, or online broker, and hold the funds in any type of brokerage account. The iShares customer base consists of the institutional segment of pension plans and fund managers, as well as the retail segment of financial advisors and individual investors.
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