ETFs have reshaped just about every area of global investing except one – most pension funds haven’t jumped on the ETF train. But that’s changing – according to a 2010 survey by Greenwich Associates, ETF’s are now being used by 14% of US pension funds, endowments and foundations. A modest start, yes, but it’s a number ETF providers are hoping will grow especially as plans stay focused on liquidity, which has become something of a Holy Grail in the wake of the 2008 financial crisis.
Right now, pension funds are mainly using ETFs for easy, short-term cash management – but that could change soon. For example, some plan sponsors are already turning to ETFs as a liquidity buffer in their portfolios. With traditional asset classes like equities and fixed income, a 10% or 20% exposure to ETFs gives them some flexibility to at least partially exit if they need to get out fast.
In other words, an escape hatch in volatile times.
But are pension funds ready to take their ETF exposure up a notch? Time will tell – and given the providers’ penchant for innovation and product creation (nearly 600 new ETFs were created globally in 2010 alone according to BlackRock) chances are plan sponsors are going to have a lot more options to choose from in the future.
That’s why it’s a great time to be blogging about ETFs, especially from an institutional perspective. I’ll be posting regularly in the coming months on everything ETF-related, from transparency to liquidity to product innovation. Things are just starting to get interesting – so stay tuned for more….
