What do investors use ETFs for?
19 May 17
The use of index trackers by professional investors has skyrocketed in recent years. Investors have been attracted by the easy access to ETFs, their transparency and of course their low fees. But what do they exactly use ETFs for? Greenwich Associates asked 132 institutional investors the question.
A growing number of institutions use ETFs to manage risk, reflecting their need for tools to help manage volatility. ETFs are viewed as effective for managing liquidity or concentration risk.
For institutions expecting to use bond ETFs for the first time, liquidity is by far the most important factor they consider. Survey respondents report meaningful reductions in fixed-income market liquidity as a result of the Basel III bank capital requirements. To comply, banks in Europe and North America have had to slash bond inventories and retreat from their traditional roles as providers of broad market liquidity. This has made index funds a more attractive option as they are considered more liquid than active funds.
At the same time, increases in market volatility could place an even bigger premium on attributes like liquidity, ease of use and quick access. “ETFs allow us to buy back quickly in the violent movement of markets— during the big drops,” the Director of Investments for a French public pension fund told the study authors.
The share of institutional ETF investors using index trackers for liquidity management increased to 45% in 2016 from 36% in 2015.
Tags: ETF | Investment Strategy | Passive Investing
