This is part two of a two-part story. Part one ran yesterday.
Gauging Institutional Interest
Gary Gastineau, managing director of ETF Consultants in Summit, N.J, said it is difficult to determine the true institutional position in ETFs because of the number of mutual funds – which would count as institutional investors in 13f filings required by the Investment Company Act – that invest in them to equitize cash overnight and the large short positions in many ETFs. Mutual funds are particularly fond of SPDRs for adjusting equity exposure. “This is a significant part of ETF usage,” he added.
ETFs also attract institutional investors interested in short selling. “The 13f reports show 150% of the shares outstanding in some ETFs are held in institutional accounts,” Gastineau said, noting that the iShares Russell 2000 Index ETF consistently boasts more than 200% short interest. “For every 100 shares of Russell 2000 that iShares issues, there are 300 shares in shareholder accounts.”
“Shorting an ETF works better for some institutional investors from an administrative and economic point of view than a futures contract,” Gastineau said. “Because futures track an index, you have to deal with mark-to-market flows on the futures contract each day, and it has to be done in futures accounts – not securities accounts.” For some accounts,
it’s much easier to short an ETF, he underscored. “Any calculation of institutional interest is going to be suspicious because short interest is going to cause a 13f report to overstate institutional interest,” he added.
Fulton said ETFs also are increasingly attracting hedge funds, which find the funds easy to trade and a quick and efficient way to gain exposure to alternative investments such as commodities and listed private equity. “ETFs are very liquid, very easy to trade and a very easy tool for hedge funds to use,” he added.
Looking Ahead
All indications are that ETFs –very attractive to investment advisors working with individual investors – are on the verge of establishing a foothold in the institutional market, not only with DC plans but with an array of investors who find them attractive for the transparency, efficiency and cost savings they offer. “There are a whole lot of changes going on, and it’s not simple,” Gastineau said. “Ultimately, yes, ETFs will be very big in 401(k)s.”
Fulton, whose firm launched the first ETF-of-ETFs in May, predicted that the more innovative the market becomes, the more attractive it will be to the institutional arena. “Those types of products are the next generation of building blocks,” he said, referring to target-date, target-risk and other newly launched exchange-traded funds.
