The Russell consultants Nick Curtin and Raewyn Williams have succinctly recounted the benefits of ETFs in dynamic trading situations, such as transition management. “[ETFs] are an implementation alternative that is quick and easy to put into place, without having to go through lengthy contract negotiations or satisfy margin or collateral requirements. An institutional investor’s custodians and operational staff tend to find that processing ETF investments are straightforward (being listed vehicles with published prices, akin to shares) while unlisted alternatives (for example, OTC swaps) can sometimes create operational complexity and risk.”
SSgA heralded the recent receipt of its exclusive licence to run an ETF against the S&P/ASX 200 as a victory for liquidity and transparency, given the ASX 200 is the reference benchmark for the main futures contract covering the Australian market. From the trader’s perspective, having both an ETF and a futures contract covering the same benchmark increased arbitrage opportunities and bolstered liquidity in both products, cementing their popularity with market makers, Citi’s Jackett- Simpson said. That being said, Vanguard Investments launched its foray into the Australian ETF market about 12 months ago, using the S&P/ASX 300 as its lynchpin benchmark. According to the head of ETFs at the manager, Robyn Laidlaw, about $200 million has flowed into that broader benchmarked product so far, albeit almost exclusively from retail investors at this stage.
Even sovereign wealth funds get into ETF s
The institutional usage of exchange-traded funds is booming around the world, putting paid to any lingering doubt outside Australia that the vehicles are meant for retail investors. Deborah Fuhr, the global head of ETF research for the world’s largest ETF provider, BlackRock, said more institutional investors now preferred ETFs over futures for such purposes as cash equitisation, transition management, rebalancing and the achievement of hard-to-obtain exposures, particularly in emerging markets. “It’s true that you need the full cash amount to fund an ETF purchase, whereas a futures contract might only require a 10 per cent down-payment on the face value, but there is an admin margin there and you don’t get any of the benefit of dividends,” Fuhr said. She cited a recent Greenwich Associates survey of ETF use among US institutional investors, which found 14 per cent of the 70 respondents (including 43 pension funds) had used ETFs, most commonly for tactical tasks related to portfolio management.
However, one-fifth of those institutional ETF users reported using the vehicles to implement strategic or long-term investment decisions. Even though a large segregated mandate with an index manager tends to be much cheaper than an ETF, the exchange-traded option saves investors the hassle of setting up a custodian account in a new investee country, says SSgA’s Susan Darroch. The institutional popularity of ETFs is not limited to the US. Recent disclosures by the US$300 billion Chinese sovereign wealth fund, the China Investment Corporation (CIC), revealed that it held US$9.6 billion in US-listed securities, US$2.4 billion or about 25 per cent of which was invested in ETFs. The CIC also revealed extensive ETF holdings in gold, commodities and energy-related indexes.