ETF Liquidity is Sparking – Here’s Why…

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ETF liquidity is sparking thanks to institutional investors. Many now look at ETFs as risk management tools and will likely support further asset growth in the nifty investment vehicle.

"Institutional usage of ETFs is growing and sparking increased liquidity in ETFs as an asset class," according to Keefe, Bruyette & Woods.

KBW argued that while institutional investors have been slow in adopting ETFs, there may be significant room for further growth in institutional ETF usage now that they have gotten a taste.

According to KBW's Inaugural Institutional ETF Survey, institutional investors have a positive view of ETFs and primarily utilize ETFs as trading tools and for their low-cost structure. Around 81% of respondents pointed to risk management as the key reason for utilizing ETFs, followed by their low-cost structure as the second-most cited factor at 47%.

While mom and pop investors may see ETFs as core components of a diversified portfolio, relatively few institutional investors use ETFs as portfolio investments. About 30% of survey participants use ETFs for asset allocation. Around 53% said they were not invested in ETFs and 47% had less than 10% of AUM invested in ETFs.

Potential concerns about ETFs may be fueling caution among institutional ETF acceptance, with respondents pointing to "mindless momentum buying," "threat," and "concentrator" as causes for concern. Institutions were concerned with an ETF's underlying index or construction methodology, secondary market trading liquidity and costs.

Why liquidity is not a concern to institutional investors

Liquidity is less of a concern with institutional investors as 66% of participants revealed they would rather own ETFs with the most precise exposure than the most liquid access.

Respondents, though, also showed stubbornness with their ETF picks as they were overwhelmingly concerned with underlying index exposure when picking an ETF, with more than half of respondents indicating they would rather not switch to a new ETF even if it offered more precise exposure.

Overall, institutional investors surveyed revealed a positive outlook for ETFs as just 3% of participants indicated they would use ETFs less in 2018 compared to 2017.

For more information on the ETF market, visit our ETF Performance Reports category.

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