Why Institutional Investors Are Increasingly Using ETFs

(May 5, 2010) — Institutional investors are becoming more attracted to exchange traded funds (ETFs), a new report shows.

State Street Global Advisors’ Capital Insights report highlights the $300 billion Chinese sovereign wealth fund, the China Investment Corporation (CIC), to show the growing use of ETFs. The fund held $9.6 billion in US-listed securities, $2.4 billion, or approximately 25%, of which was invested in ETFs. CIC’s ETF holdings were largely concentrated in gold, commodity and energy-related ETFs.

According to Morgan Stanley, at the end of 2008, more than 2,900 institutions held ETFs representing a 15% growth on a year-over-year basis and nearly four times the number of institutional holders at the end of 2000. ETFs have fundamentally changed the way institutional investors construct portfolios, the report stated.

ETFs are used most widely by investment advisers and hedge funds, but SSgA says insurance companies, pension funds and endowments are increasingly adopting ETFs. According to the report, seventeen of the 20 largest mutual fund complexes use ETFs, while fifteen of the 20 largest hedge funds use them. Additionally, each of the five largest university endowments has ETFs among their top 10 holdings.