Investors Innovate With ETFs To Enhance Liquidity

Tara Loader Wilkinson

31 May 2012

Institutional investors are increasingly turning to exchange traded funds to facilitate a number of surprising fund management practices, a new study has shown.

According to a study by US-based Greenwich Associates, institutions which integrate ETFs into their standard manager transitions or cash equitisation processes, are using ETFs for additional applications, like liquidity management.

The iShares-sponsored study showed that seventy-eight percent of asset managers and 44 per cent of pensions, foundations and endowments use ETFs for cash equitisation. Sixty-one percent of asset managers and 55 per cent of institutional funds use ETFs for manager transitions.

Thirty-one percent of institutional funds and one-third of asset managers are now employing ETFs as part of an ETF overlay or sleeve to add liquidity to a portfolio and/or to reduce implementation and trading costs. That usage rate is up from just one in 10 among both groups in 2011.

The adoption of ETFs as a tool for liquidity enhancement demonstrates how institutional investors are applying ETFs in new ways to solve problems, said Liz Tennican, head of US institutional sales for iShares at BlackRock.

“The marked increase in the use of ETFs for liquidity management is a significant development, reflecting sharper focus by institutions to assert control over their operational abilities during periods of irregular market conditions,” she added.

“Liquidity has become a governance issue since the global financial crisis. Institutional investors are applying their acquired knowledge from that period to their search for effective liquidity solutions. ETFs can be an effective tool for them.”

As institutional investors use ETFs more strategically, they also apply ETFs to portfolio completion. This year, 28 per cent of asset managers and 42 per cent of institutional investors use ETFs for portfolio completion. Last year, approximately just one-in-five institutional investors used ETFs for portfolio completion. Tennican said, “We are finding that institutional investors are expanding the types of asset classes when they utilize ETFs, for example, expanding further into international single countries and US and international fixed income.”

The study was conducted between February and April 2012 through live, one-on-one interviews between Greenwich Associates and representatives of pensions funds, endowments, foundations and asset management companies. All participants were from organisations that include ETFs among their portfolio holdings.