ETF Market Explodes as Asset Managers Innovate

Greenwich Associates study for iShares shows ETF liquidity and transparency drive innovation

A few weeks ago, a boutique asset manager called the iShares capital markets desk with a request to take a $248 million position in the iShares Barclays US Treasury Bond Fund (GOVT) exchange-traded fund. Because the boutique firm had never executed such a trade before, the cap markets desk helped the manager walk through the steps necessary to make the trade.

It was the first time the asset manager took such a large position in the fixed-income ETF, but it won’t be the last, according to iShares officials. Indeed, a recent Greenwich Associates study of institutions’ use of ETFs suggests that more and more institutional-size asset managers are making monster trades, without disrupting the bond markets, because ETFs trade on indexes rather than on the underlying securities.

“The ETF is an effective tool for institutions. Institutional investors are looking for liquid beta in a fast-moving market,” said iShares managing director Loc Vukhac at a media breakfast in New York on Tuesday at the BlackRock headquarters. “You’re seeing the democratization of the fixed-income world as trades move from the phone to an exchange.”

Vukhac, head of the iShares Asset Management and Hedge Fund Group, pointed to a recent record trading day of $780 million of institutional trades involving the iShares iBoxx $ High Yield Corporate Bond Fund (HYG). He remarked that if such large trades had disrupted the fixed-income markets when made, the roomful of financial journalists at the New York briefing would have known about it.

Many institutional investors using ETFs in innovative ways are registered investment advisors, noted Sue Thompson, head of the iShares Registered Investment Advisor Group. The RIA Group has seen phenomenal growth, to 100 boutique managers totaling $46 billion in ETF assets this year versus only a few managers with $5.8 billion in assets in 2009, Thompson said.

“It’s exciting to see this new space growing before our very eyes,” she said, adding that this week a group of boutique managers are meeting to exchange ETF trading ideas at an iShares-sponsored event. “These people may compete with each other, but we expect to see a lot of networking.”

This is the third year that independent research firm Greenwich Associates has conducted the ETF study for iShares. Findings from this year’s study include:

  • Corporate and public pension funds, foundations and endowments use ETFs for “manager transitions” after an active manager has been fired and before a new manager comes on board. Sixty-one percent of asset managers and 55% of institutional funds use ETFs for manager transitions.
  • Thirty-one percent of institutional funds and one-third of asset managers now use ETFs as part of an ETF overlay to add liquidity to a portfolio or to reduce implementation and trading costs. That usage rate has skyrocketed from just one in 10 among both groups in 2011.
  • As institutional investors use ETFs more strategically, they also apply ETFs to portfolio completion. This year, 28% of asset managers and 42% of institutional investors use ETFs for portfolio completion. Last year, approximately one in five used ETFs for portfolio completion.

Read Advisors Reject Buy and Hold, 60/40 Stock-Bond Allocations at AdvisorOne.

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