(June 2, 2011) — The Australian exchange-traded fund (ETF) industry should focus on institutional investors, says Russell Investments.

While retail use of ETFs has boomed in Australia, institutional use of the investment vehicles has not caught up to speed, contrasting with the way the ETF market has developed in Europe and the United States. Russell commissioned Deloitte Actuaries & Consultants to undertake interviews with 20 institutions that directly manage or advise more than 40% of Australian funds under management in a bid to discover their views on ETFs.

The study finds that 30% of institutions will consider using ETFs in the future in a significant way, with education and innovation being key to evolution of institutional ETF market. The report follows Russell’s launch of a new research report, “Digging Deeper: Institutional ETF investing in Australia,” which looks at how Australian institutions are using ETFs and plan to use them in the future.

Despite the growing popularity of ETFs, the local market is still in its infancy. “While some institutions initially perceived ETFs as a retail solution, the research found that the majority of institutions use ETFs in small way,” says Amanda Skelly, director ETFs at Russell Investments, in the report. “This is a positive sign for the industry although there is still a lot more we could do to help drive growth through product innovation and education.”

Furthermore, Russell’s research notes that many larger institutions have also considered more innovative uses of ETFs in non-core parts of their business or for portfolios constructed for specific clients. “As institutions continue to evolve to address specific customer needs, be it managing pension assets differently, expanding the types of exposures they are seeking to access or taking a more macro approach to investing, ETFs can play a role. They should be considered alongside all other types of investment vehicles,” Skelly asserts. Meanwhile, for smaller institutions, Skelly notes that comfort with existing investment structures and processes and limited knowledge of ETFs have been the main barriers to acceptance.

Last week, a report by Greenwich Associates — based on interviews with 45 institutional funds, including corporate pensions, public pensions, and endowments and foundations, and 25 large asset management firms in the US collectively overseeing roughly $7.5 trillion — revealed that institutional investors are increasingly bullish on using ETFs in their portfolios. “Perhaps even more telling than those findings is the fact that not a single asset manager reported plans to cut ETF allocations in the coming two years, and less than one in 10 institutional funds plan to reduce allocations to ETFs in that period,” says Greenwich Associates consultant Andrew McCollum.

According to the firm, nearly one-half of the asset management firms and one-third of the institutional funds taking part in the Greenwich Associates study of current institutional ETF users plan to increase the share of portfolio assets that they invest in ETFs over the next two years.