After spending years as a staple in the retail universe, ETFs appear to be getting a lot more respect in institutional circles. According to a widely publicized study released by Greenwich Associates last week, ETFs are on the rise among institutional asset managers.
It’s a growth trend that is expected to accelerate (rapidly!) in the coming years—nearly half (48%) of asset managers surveyed said they plan to boost their ETF allocations by 2013.
This report really confirms what most ETF managers already know—institutional investors, including pension funds, are mainly using ETFs for cash management—areas like transition management, where 63% say they use them for this purpose (up from just 38% over last year). No doubt it’s a huge growth area for the ETF business as more and more institutions turn to them as a liquid and cheap way to deal with cash, particularly on the pension side.
The question is—how long will it take institutions to move beyond cash management when it comes to their ETF use?
To get there, the industry likely has more educating to do, not just in Canada, but around the world.
In my opinion, one of the big untapped areas is infrastructure. Here in Canada, plan sponsors have been eager to up their allocations to infrastructure to capture those nice, steady fixed income-like returns. For all but the biggest funds, however, access has been a constant challenge. Top managers tend to lack capacity and all too often the best deals are aimed at the biggest funds—hey, not every pension fund can go out and buy the Confederation Bridge.
Gaining exposure to infrastructure through an ETF could be just the ticket for smaller plans wanting to dip a toe into the space.
Will it happen? Only time (and education efforts) will tell. Meantime, cash is still king when it comes to pension funds using ETFs.
