The China Investment Corporation holds $2.4bn in ETFs and is one of many institutional investors to increase usage of these funds, according to State Street Global Advisors (SSgA).
In its Capital Insights report, the firm says the $300bn Chinese sovereign wealth fund's investment in ETFs, which represents 25% of its total amount invested in US-listed securities, shows how ubiquitous and growing the use of ETFs is among institutions.
SSgA says since it launched the SPDR S&P 500 in 1993 as a cash equitization vehicle for institutional investors, the range of uses for these funds has really expanded and evolved.
Although ETFs are used most widely by investment advisers and hedge funds, SSgA says insurance companies, pension funds and endowments are increasingly adopting ETFs.
It says seventeen of the 20 largest mutual fund complexes use ETFs, while fifteen of the 20 largest hedge funds use them.
Institutional investors can use ETFs, futures and swaps interchangeably, with each having advantages. SSgA says ETFs provide exposure to a wider range of benchmarks and have full transparency, although they can be more expensive during long holding periods.
The firm says one of the most common uses of ETFs is as a cash equitization tool for mutual funds, pension funds or endowments. Portfolio managers will invest excess cash in an ETF tracking an index similar to that which the portfolio follows to eliminate cash drag.
Although cash equitization has typically involved equity ETFs, it has evolved to include fixed income and gold ETFs.
SSgA adds in 2009, when high-yield bond mutual fund cash flows soared, it became difficult to promptly put money in the asset class, so some portfolio managers used high-yield bond ETFs to equitize their high yield bond exposure.
The firm says ETFs have evolved beyond their original uses and as the market continues to grow, institutions will be able to select even more precise and liquid ETF solutions.
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