Articles

Understanding the institutional approach to ETFs

Anthony Chan of BlackRock looks at how institutional investors are using emerging market ETFs, and what this might indicate for the wider market.

Date: Mar 2011

Tags: Liquidity, Active management, Emerging markets, Alpha, Beta

  • It has been common for institutional investors to hold positions in emerging market ETFs for transition-management purposes
  • Given their experiences in 2008, a lot of these investors are increasingly bringing their core asset allocation in house – which might range from the simple use of an ETF to using ETFs for broad transition-management or exposure
  • Institutional investors have also started to realise that by dividing up the markets in different ways, this can add value through the asset allocation choice

According to Anthony Chan in an interview, it has been common for institutional investors to hold positions in emerging market ETFs for transition-management purposes.

With large amounts of money coming in, they can maintain exposure to the market without having to allocate immediately to a manager, he explained.

Plus, they benefit from the liquidity and being able to get in and out of the market very quickly.

Evolving use among institutional investors

Given their experiences in 2008, Chan said a lot of institutional investors are reviewing their traditional models of outsourcing the management of funds to external active managers.

Instead, he said they are starting to examine what they get out of these managers, adding that they realise they have to take more control themselves.

While they will still use active managers to add alpha, they are increasingly bringing their core asset allocation in house, explained Chan.

This might range from the simple use of an ETF to using ETFs for broad transition-management or exposure.

In one example Chan gave in relation to emerging markets, an investor who was looking for Asia ex-Japan equity exposure combined several ETFs in different ways to achieve this.

Investors have also started to realise that by dividing up the markets in different ways, this can add value through the asset allocation choice.

Alpha is therefore not just available through securities selection, said Chan, but also by taking a top-down, asset allocation approach.

 
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