ETFs take root in pension space

A new tool for diversification and "portfolio completion".

May 22, 2012

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green shootsIt’s happening, slowly but surely. ETFs are claiming a bigger share of the institutional space as investors, including many pension funds, find new ways to use them strategically. For a few years at least, many funds have used ETFs for basic cash management. But according to a new study by Greenwich Associates, public pension funds, foundations and endowments are making more use of ETFs to manage liquidity and even to boost portfolio diversification.

The study reports that 78% of asset managers and 44% of pensions, foundations and endowments use ETFs to cash equitization while 61% of asset managers and 55% of institutional funds use them for manager transitions.

ETFs also continue to make headway in helping investors manage liquidity – that “liquidity sleeve” use that some ETF providers have been describing for the past couple of years. Right now, 31% of institutional funds and a third of asset managers are using ETFs as an overlay or sleeve to boost portfolio liquidity or reduce implementations and trading costs. This has risen substantially, up from just one in 10 among those groups in 2011.

One new and interesting area of use is “portfolio completion” or diversification. More institutions are using ETFs as a way to explore new asset classes or expand their exposure to specific asset classes or regions. Country-specific ETFs have helped fuel demand in this area as have internationally-focused ETFs. In 2011 year 28% of asset managers and 42% of institutional investors use ETFs for portfolio completion versus last year when just one-in-five institutional investors did so.

It’s a new and interesting trend in the space as more institutional investors turn to ETFs as portfolio building blocks rather than just as tools to manage cash or to manage liquidity.

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