Institutional investors have increased their demand for exchange-traded funds, and the trend is likely to continue, according to a report from Moody's Investor Service.
The demand for ETFs, due to their liquidity, transparency, diversity and low cost, has led to institutional investors owning about 64% of the outstanding shares of the 20 largest ETFs, according to the report, “ETFs: Increased Liquidity and Product Range Drive Institutional Participation.”
According to Moody's estimates, for example, institutional investors own 85.5% of the outstanding shares in State Street Global Advisors' SPDR S&P 500 ETF, the No. 1 ranked ETF in assets under management.
While ETFs account for only 9% of the overall U.S. mutual fund industry, they have grown at a compound annual rate of 17%, exceeding the growth of traditional mutual funds, which have grown 1.7%.
“ETFs are increasingly attracting flows that once would have gone into traditional mutual funds, or to hedging vehicles such as futures and swaps,” said Stephen Tu, vice president and senior analyst, managed investments at Moody's and author of the report, in a news release. “This institutional participation will likely continue to expand, which is a credit positive for large ETF providers such as BlackRock (BLK), State Street and Invesco (IVZ).”
Among the applications that have proven attractive for institutional investors are to provide cash equitization and exposure to different asset classes, and to become a tactical portfolio management tool for short- and medium-term purposes.