From all the public disdain some active managers express about exchange-traded funds, you’d think they’d steer clear of the product.
Yet active managers are one of the hungriest purchasers of the products, according to data collected internally by BlackRock’s iShares arm
The data, which was garnered from public SEC filings made by asset managers, shows that the demographic has bought over $121 billion worth of the products to build actively managed portfolios, with ETFs serving as the primary building block instead of say, stocks, bonds or any other asset.
“Active managers are using ETFs more and more,” Daniel Gamba
, head of BlackRock’s institutional iShares business told MFWire
. “A lot of retail clients are demanding it. They want the building blocks of their portfolios to be in ETFs.”
The biggest users of the products include big names such as Northern Trust
, State Street
, as well as BlackRock itself, among others.
Gamba says that asset managers use ETFs in two ways:
1. The traditional role has been to equitize cash.
“Mutual funds hold a percentage of their assets in cash. How much depends on application. It could be for annuities or on hold for active allocations, etc.,” he says.
2. The growing use of ETFs is for asset allocation.
“Active managers are using them in balanced funds, asset allocation funds, DC funds and even annuities. Active managers are using them as building blocks for these funds,” he says.
During a number of conversations Gamba has had with clients on the subject of ETF portfolios, he noted three prominent themes that kept entering these conversations regarding the products. These themes are why many of his active manager customers are buying the products.
1. They are easier to explain to clients.
“Clients understand if you are investing in China or Brazil better than they can understand why you are investing in a particular corporation or asset. It is easier to explain a sector or theme than just one company. Advisors need to explain their decisions to clients and it is easier to explain that, say, China will continue to grow because its GDP is still going up versus explaining the specifics of a single business.”
2. The availability of the product.
“Managers can have a really good asset allocation portfolio because the products can help them manage the risk and return in a much more efficient way. Not just Treasuries and Tiffs, but also credit and high yield and emerging market bonds, and even local currency denominated debt in local bond markets, for a full variety of risks and returns. There is such an array of ETFs that they allow active managers to create full solutions. Say I was interested in an idea involving Emerging Market high yields, ETFs can give active managers full exposure to the theme. A full plethora of products allows them to create diversified portfolio value to clients.”
3. They are the hot new thing in investments.
“Everybody is writing about ETFs. Everybody is talking about ETFs. ETFs have become a disruptive technology that is changing the way people invest. Everybody wants to build ETF portfolios.”
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