The Top ETF Use Cases of Institutional Investors
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The Top ETF Use Cases of Institutional Investors

The ETF snapshot
ETFs during volatility Part 1 of 5
Fixed income ETFs Part 2 of 5
ETF use cases Part 3 of 5
Evolution of ETFs Part 4 of 5
Choosing an ETF Part 5 of 5

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ETF Snapshot

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The Top ETF Use Cases of Institutional Investors

Institutional investors are relying more on ETFs during periods of severe volatility—but how exactly is this vehicle being used within their broader portfolios?

In this infographic from iShares, we highlight their three primary use cases for ETFs. It’s the third of a five-part series covering key insights from the ETF Snapshot, a comprehensive report on how institutional investors manage volatility.

The Methodology

To assess how institutional investors navigated this volatility, Institutional Investor published a report in 2021 based on a survey of 766 decision makers. Respondents were from various types of organizations, firm sizes, and regions.

For instance, here is how responses broke down by location:

  • 21% Asia Pacific
  • 36% North America
  • 29% Europe, Middle East and Africa
  • 14% Latin America

Here’s what the survey found.

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Global Forecast 2022

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ETF Use Case #1: Transition Management

70% of respondents (n=534) use ETFs when moving from one manager to another. The following table provides a breakdown of regional results.

Region% of respondents listing “transition management” as an ETF use case
Latin America81%
EMEA*73%
North America69%
Asia-Pacific55%
Average70%

*EMEA includes Europe, Middle East, and Africa

Institutional investors cited the extra utility that ETFs provide, namely in terms of maintaining beta exposure (the portion of return that can be attributed to the overall market) and minimizing performance drag (the negative effect of fees on performance).

In other words, using relatively low cost ETFs during transitions can enable an institutional investor to maintain market exposure with minimal fees.

ETF Use Case #2: Tactical Adjustments

61% of respondents (n=468) use ETFs to make tactical adjustments within their portfolios. The following table provides a breakdown of regional results.

Region% of respondents listing “tactical adjustments” as an ETF use case
Latin America69%
EMEA69%
North America59%
Asia-Pacific49%
Average61%

Tactical asset allocation refers to shifts in the portfolio’s asset mix that are intended to take advantage of market pricing anomalies or strong sectors. Tactical adjustments are temporary, and a manager will eventually bring the portfolio back to its strategic asset mix after the achieving their desired results.

When asked which types of ETFs are suitable for implementing tactical adjustments, 66% responded with fixed income, 57% responded with equities, and 34% responded with factor/smart beta ETFs.

ETF Use Case #3: Liquidity Management

The third most common ETF use case (n=394) was liquidity management. See below for a breakdown of regional results.

Region% of respondents listing “liquidity management” as an ETF use case
North America84%
Latin America55%
EMEA38%
Asia-Pacific15%
Average52%

When asked which types of ETFs are suitable for managing portfolio liquidity, 83% responded with fixed income, 27% responded with equities, and 22% responded with factor/smart beta ETFs. This is likely due to the events of 2020, where panic over the initial outbreak of COVID-19 caused bond market liquidity to dry up.

ETFs Continue to Gain Ground

Thanks to their suitability in various use cases, ETFs have quickly become a core component of the institutional investor’s toolkit. In fact, 65% say they will increase their use of ETFs going forward.

Those that didn’t may soon change their minds—experts have predicted more market volatility in 2022 as supply chain issues, inflation, and geopolitical conflicts escalate.

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