SSgA Says ETFs Gain Momentum Among Schemes; IMF Expresses Concern

(April 18, 2011) — Exchange-traded funds are gaining traction among pension schemes, according to Kevin Quigg, head of State Street Global Advisor’s (SSgA) global ETF capital markets group.

“With the growing number of products in the marketplace, ETFs have always been used to gain transparency and liquidity,” Quigg told aiCIO. “They’ve become more attractive relative to other products,” he said, noting that pensions have made greater use of ETFs for improved tactical allocation.

Quigg also noted that another trend he has witnessed in the marketplace has been among larger pensions, which have increasingly used ETFs in their internally managed portfolios. From an asset class perspective, harnessing ETFs to gain exposure runs the gamete, Quigg said. “ETFs really are the least expensive and easiest way to gain exposure to the gold market, and using these investment vehicles to gain access to emerging markets is becoming more and more popular among institutional investors.”

BlackRock, the world’s largest asset manager, agrees that the use of ETFs is increasing rapidly. In its latest “ETF Landscape: Industry Review,” BlockRock predicts that global exchange-traded fund assets will reach $2 trillion by the end of next year. According to the investment firm, ETFs have been most popular in the United States among retail investors, but are attracting increasing attention from institutions. Furthermore, BlackRock indicates that the US ETF industry is at a “crossroads,” and may soon see tax and regulatory changes.

The range of investment in ETFs among schemes is wide, according to Financial News. While the $100 billion Texas Teachers Retirement Fund has $3.35 billion in the Vanguard MSCI Emerging Market ETF, the UK’s £9.6 billion Strathclyde pension fund holds none. Axel Lomholt, head of product development for iShares, the world’s largest ETF provider, told the news service: “Over the past two years there has been a fundamental shift to pension funds using ETFs for core holdings.”

But, amid the growth of the ETF industry, the International Monetary Fund (IMF) has become the latest financial body to reveal worries about the industry — concerns that have also been expressed recently by the Financial Stability Board (FSB) and the Financial Services Authority (FSA). The worries stem largely from the increasing size of the synthetic ETF market in Europe, which it argues increases the potential for contagion.

“The gross exposures of these funds raises some concerns on whether current restrictions on derivative contracts are sufficient to curtail counterparty risks from becoming systemic under stressed market conditions,” the IMF asserted in its The IMF’s latest Global Financial Stability paper, adding that investors are dissatisfied with current regulation of the industry.