This experience is becoming all too common according to the new Greenwich Associates Survey on U.S. ETFs, which shows how more and more institutional investors are viewing them through a strategic lens rather than just as a tactical, short-term tool.
According to Greenwich, 58% of institutions describe their use of ETFs as strategic in nature versus only 53% that describe their use of ETFs as tactical.
As one investor quoted in the survey put it:
“Initially, it was a transition strategy. It kind of grew beyond that into a liquidity strategy because it was a convenient place to have some money in case we needed cash to pay benefits. It developed into much more of a diversification plan at this point.”
One key driver of this new strategic use has been a growing demand among investors for passive exposures as part of the core/satellite portfolio: 62% of institutional funds are using ETFs this way in the core portfolio, according to Greenwich.
It’s a big shift in just a couple of years. Back in 2011 when I first started writing this blog, pension use of ETFs was all about transition management and cash equitization. And of course some plans were using ETFs for exposure to a few new and burgeoning asset classes (e.g., emerging markets) or as a placeholder while they looked for new managers in the wake of the 2008 financial crisis.
But while ETFs were a short-term parking spot for plan sponsors just a couple of years ago, they’ve now clearly turned into a more long-term part of the plan. Pension plans didn’t expect to stay as long as they did – but in using them for a quick entry and exit into the market, they have come to realize ETFs make sense for a longer-term allocation.
Right now, for example, passive exposure in the core tops the list of institutional uses. According to the survey results—67% list it as their top use versus just 51% who use ETFs for cash equitization, 54% using them for transitions, 59% using them for rebalancing and 50% who turn to them for tactical adjustments.
The results of the Greenwich Survey serve to underscore a shift already being felt in the pension space—plan sponsors are now sticking with their ETFs as they become a more fundamental part of the long-term investment portfolio.