In the fast-moving world of exchange-traded funds, defined benefit plans, endowments, foundations, hedge funds, mutual fund managers and other institutional investors are becoming a larger — and increasingly sought-after — segment of the investor base.
In fact, in just the last five months of 2010, U.S. institutional investors increased their investments in ETFs by 46% to $512 billion as of Dec. 31, according to Invesco PowerShares' analysis of 13F filing data from FactSet Research Systems Inc., New York.
In an industry that has primarily been the domain of retail investors for the past dozen or so years, the increased use of ETFs (used here to also refer to exchange-traded notes, both of which are known collectively as exchange-traded products) by institutional investors represents a “back-to-the-future” scenario, said Paul Justice, director of ETF research for Morningstar Inc., Chicago.
“Way back in 1993 when the first ETF debuted in the U.S., they were the province of institutional investors. Pension funds used ETFs as a transition management tool to equitize cash they were holding until they could invest the assets with a new money manager or in a new asset class. Back then, hedge fund managers gradually started to use ETFs to short markets,” Mr. Justice said.
“It wasn't until about 2000, when iShares came on the scene and began to educate financial advisers about ETFs that their popularity with retail investors began to rise. Today, the ETF market has a very broad base of users, a useful blend of institutional and retail investors, but it didn't start out that way,” Mr. Justice added.
In fact, the blend Mr. Justice points to is a pretty even mix. Industry sources use a rule of thumb that splits the ETF base by dollars invested 50-50 between institutional and retail investors.
That rough breakdown means institutional investment in ETFs was a hefty $700 billion at year-end 2010, based on the $1.4 trillion invested in 3,503 ETF offerings worldwide, according to research from BlackRock Inc.'s global ETF research and implementation strategy team. BlackRock owns iShares, the largest ETF provider in the world, according to its own ranking.
Sources say it's impossible to get an exact breakdown of the U.S. investor base in the exchange-traded market since shares are traded anonymously on stock exchanges around the world. But experts said analysis of quarterly 13F Securities and Exchange Commission filings from investors holding at least $100 million in U.S. common stocks is one way to look at more precise ownership statistics.
According to an analysis by Wheaton, Ill.-based Invesco PowerShares of fourth-quarter 13F filing data from FactSet, $512 billion invested in ETFs by U.S. institutions as of Dec. 31 represented 51% of the $995 billion of total U.S. ETF assets, and was up 46% from the $352 billion reported as of July 31. The July figure represented 42% of total U.S. ETF industry assets, according to the PowerShares analysis.
Invesco PowerShares and FactSet, BlackRock and other ETF researchers use a liberal interpretation in defining their “institutional investor” universes, including brokers, banks, insurance companies and private banking portfolios in addition to defined benefit plans, endowments and foundations, and money managers.