In my recent
on why investors should consider ETFs for the core of their
portfolio, I highlighted the trend of institutional investors
using ETFs in the core. A recent report from Greenwich Associates
reinforces this fact.
Greenwich interviewed over 200 institutional investors,
including pensions, foundations, endowments, insurance companies,
asset managers and large investment advisors about their ETF
usage. What did they find?
- The share of U.S. institutions using ETFs has increased in
each of the past five years and is expected to rise in the
- Nearly half of institutional ETF users now allocate more
than 10% of their total assets to ETFs.
- Institutions reporting average holding periods of two years
or longer jumped to 49% in 2014, versus 36% in 2013.
- A growing number of institutions, approximately 80%, are
using ETFs to obtain core portfolio exposures.
- Institutions dabble in ETFs for specific strategies, and
then broaden their usage to new asset classes or strategies
after discovering the utility of ETFs.
These findings do not surprise me. I spend many of my days
talking to institutional investors, such as those surveyed in the
Greenwich report, and hearing about their investment challenges.
ETFs, once thought of by many as a purely retail product, have
begun to be recognized by institutional investors as a
technological advancement in the world of investing. Why?
To keep it simple, think of technology as a transformation of
a financial structure that delivers access and efficiency gains
beyond what existed before. As low-cost, tax-efficient, easy to
access, and liquid investment products, ETFs are a technology
that institutional investors have discovered and are increasingly
putting to use. The trend is becoming more prevalent for
long-term investing as a core investment portfolio tool.
I'm often asked why this matters for retail investors or
if this is even a good thing. In short, the answer is yes it
matters and yes, it's a good thing…for several key reasons:
- More investors implies larger fund size and trading
volumes which can help improve the tracking ability and
tradability of ETFs.
- Many institutional investors, such as pension funds, manage
investments on behalf of millions of individual investors, who
are in turn exposed to the efficiency benefits that ETFs can
- Product innovation - as institutional investors demand new
products, strategies that were once only available to large
investors can be brought to individual investors through an ETF
Unlike some other aspects of investing, having a larger and
more diverse set of investors in the ETF landscape is not a zero
sum game - efficiencies and benefits can be enjoyed by all. I
remember years back when only the most sophisticated people I
knew had smartphones. Now you can't walk more than two steps
without seeing one in the hand of just about everyone. As a
result, we all enjoy more choice and more efficient
communications. I'm not posing that ETFs will be in the hands of
all investors. I only offer that it is a step in the evolution of
investing. And thanks to Greenwich, we can see that we are
getting just a little bit closer. Pension plans, insurance
companies, endowments, foundations, asset managers - all plan to
keep increasing their usage of ETFs.
Daniel Gamba, CFA, is Managing Director and head of
BlackRock's iShares Americas Institutional Business. He is also
a member of BlackRock's Global Operating Committee. He is a new
There can be no assurance that an active trading market for
shares of an ETF will develop or be maintained.
Transactions in shares of ETFs will result in brokerage
commissions and will generate tax consequences. All regulated
investment companies are obliged to distribute portfolio gains to