Institutions are using ETFs as a cost-efficient diversified core holding to obtain access to a certain asset classes.

More than one quarter of institutional investors use exchange-traded funds for long-term strategic purposes, according to a new report.

Cerulli Associates discloses this finding in a December 2013 issue of “The Cerulli Edge: U.S. Monthly Product Trends.” The report examines product development trends in 2013 and explores opportunities in liquid alternatives.

The survey reveals that 28 percent of institutional investors have adopted ETFs for long-term strategic purposes. The same percentage of institutional investors either:

  1. Use ETFs for short-term tactical opportunities; or
  2. Do not recommend that clients use ETFs.

By far the largest percentage of these investors (72 percent) use ETFs for liquidity purposes.

“Institutions often need to maintain target exposures to certain asset classes, and are frequently challenged due to surplus cash positions drift from volatile markets or when transitioning managers,” the report states. “Accordingly, many institutions draw on ETFs as a liquidity vehicle to quickly and efficiently bring exposure mismatches in line with targets.

“As ETF product offerings broaden, institutions are also employing ETFs for additional tactical positions based on market views to gain timely exposures to specific sectors, such as commodities,” the report adds. “Institutions are also using ETFs for longer-term strategic allocations as a cost-efficient diversified core holding to obtain access to a certain asset class that may be less accessible to some investors, such as frontier markets or agricultural investments.”

Among the reasons for which consultants “often” or “sometimes” recommend the use of ETFs in institutional portfolios, the Cerulli report cites the following:

  • Liquidity purposes (75 percent);
  • Source of cheap beta/cost-efficient diversified core holding (46 percent);
  • Garner alternatives, commodities, currency options (43 percent);
  • Hedge/short market exposure (27 percent);
  • Implement a thematic approach (i.e., gain exposure to an asset class, such as emerging markets);
  • Sector-specific exposure (e.g., health care or technology); and
  • Single-country exposure (e.g., China or Brazil).