All That Glitters.
Don't believe the hype, one consultant advises.
Wall Street and asset management firms are "always looking to sell the 'next new product,' aren't they?" he asks. The US-based consultant services some of the largest corporate institutions in the nation. "But despite this buildup from research and the media, the truth is, 'The Boom' has yet to translate into portfolios of true, long-term institutional investors." These asset owners lack not only the need for daily liquidity, but also are neither tactical nor nimble enough to facilitate frequent trading of ETFs, he continues. "It takes weeks and months to put a strategy in place and implement them for these clients with assets in the billions of dollars. They aren't day traders."
But couldn't even the most diligent investor occasionally get swept up in the media frenzy-enough to lose its "institutional mind?" Yes, the consultant admits. He has come across one or two investment board or committee members who will cite the Wall Street Journal and insist on the purchase of, say, gold mines or Japan equity ETFs. "Some investors buy odd, one-off exposures largely because of what they read. We then reel them back and remind them to keep with an institutional strategy and a strategic allocation for the long term," he says. "The media touts ETFs as a tool to gain exposure to niche markets-a catch-all-but in reality, larger asset owners are more suitable for institutional-quality vehicles."
However, another consulting firm-Connecticut-based Greenwich Associates-asserts that the once retail-centric ETF has successfully seeped into the institutional space and will continue to do so. A May report observed asset owners turning to ETFs of new asset classes, especially fixed income, in a shifting interest-rate environment. New regulations following the financial crisis have resulted in "reduced dealer inventories of fixed securities and lower levels of liquidity in the secondary markets," also driving growing opportunities for ETFs in institutional portfolios, the firm says.
The evolution doesn't stop there. Investment advisors are placing ETFs at the heart of their strategies, beyond filling an asset class gap or accomplishing short-term tactical goals, Greenwich Associates argues. Not only are holding periods lengthening, but ETFs are expanding into strategic roles such as liquidity, risk management, and hedging. "Both usage rates and allocations are expected to continue rising as institutions discover new applications for the vehicles and innovation by providers make ETFs more flexible," the firm said.
BlackRock, purveyor of iShares-the world's largest ETF provider-partnered with Greenwich Associates to produce the report.
Whether it's hype or an honest-to-goodness shift in uptake, asset owners can and should wait for sweeter fee structures, the consultant stresses. There exist other institutional vehicles-that fit the long-term mindset of institutional investors-with better fee structures, he continues, leaving no immediate need to incorporate ETFs. "Or, we could wait for investment boards to alter their decision-making timeframe completely. If clients can make decisions in a matter of days, then maybe we'll say yes to ETFs."