It wasn’t supposed to last, said one plan sponsor I spoke to recently at an industry event. He was telling me about his allocation to a U.S. equities exchange-traded fund, a shift that was made while his pension plan looked for a new active U.S. manager. The manager was never found; instead, the plan has stayed invested in the ETF and there are no big plans to change that any time soon.
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.