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The U.S. ETF industry is at a “crossroads,” and has seen an increasing number of Institutional clients use ETFs in the last year, according to a 2010 study by Greenwich Associates.

Did you know?

Half the assets invested in ETFs in the United States are held by Institutions according to recent industry estimates. Although most people think of ETFs as a retail product, institutional investors are finding that ETFs can be helpful tools as well.

Institutional clients use ETFs

Of the 70 U.S. plan sponsors and money managers using ETFs that were surveyed by Greenwich Associates, the primary uses of ETFs include:

• implementing short and/or long-term adjustments to portfolio allocation
• gaining temporary market exposure for assets while transitioning from one external manager to another

These two primary ETF uses go hand-in-hand with the movement by many Institutions from active management to passive. As more Institutions move to passive investments unless an extraordinary case can be made for the alpha provided by an active manager, Institutions are looking for ways to augment their core portfolio construction. ETFs can be one such vehicle.

When utilizing ETFs, Institutions said they used them for both tactical and long-term purposes. Equity ETFs, both domestic U.S. and International, were a frequent means of tactically tilting portfolio allocations or investing excess cash into the marketplace.

Asset Allocation to ETFs in the Next 3 Years

Institutional investors expect their ETF usage to increase in the next three years:

• Of the 70 institutions currently employing ETFs, almost 55% will increase their ETF asset allocation.
• Over half of the Institutions with an investment in ETFs plan to keep their allocation % steady.
• Nearly 30% of institutions that do not use ETFs say a lack knowledge about ETFs is preventing them from investing.

A copy of the full Greenwich Associates study is available: “ETFs Gain Foothold in Institutional Market“