Mutual Funds & Asset Managers

Common ETF Implementationation Strategies

Strategy Objective
Transition Management Maintain exposure while searching for new managers
Rebalancing Reduce implementation time to change exposures in asset classes
Cash Equitization Maintain liquidity1 while remaining fully invested
Portfolio Completion Aims for portfolio diversification and seeks to minimize benchmark risk while maintaining performance objectives.
Securities Lending Potential for additional return
Tactical Adjustments to Asset Allocation Over - or underweight certain styles, regions or countries on the basis of short term view
Long / Short ETF Applications Obtain long or short exposure
Taxable Plans Benefit from the tax efficiency2 of ETFs
Fixed Income Duration and Credit Adjustments Fine-tune the target duration1 and credit quality of fixed income portfolios
Small Institutional Plans Implement the desired asset allocation regardless of plan size

Although ETFs are most commonly thought of as a retail product, institutional investors typically find that ETFs can be helpful tools in critical portfolio management tasks.

1 Shares are not individually redeemable and owners of shares may acquire those from the Funds and tender those shares for redemption to the Funds in creation unit aggregations only, typically consisting of 50,000 shares.

2 Invesco PowerShares does not offer tax advice. Please consult your tax adviser for information regarding your own tax situation.

ETFs disclose their full portfolio holdings daily.

Finding the Right Tool for the Job

  ETFS FUTURES SWAPS
Round Trip Execution Costs Commission & bid/ask spread Commission & bid/ask spread Usually Commission
Holding Costs Total Expense Ratio (TER) Roll, basis risk, margin Financing
Tracking Error Yes Yes No
Minimum Trade Size 1 Share 1 Contract Variable
Expiry No Monthly or Quarterly Fixed
Available to Lend Yes No No
Legal Structure Fund Listed Derivative Over-The-Counter Derivative
Liquidity Provided Exchange Dealers Exchange Dealers Single Dealers
Advantages
  • Variety of offerings
  • Liquidity1
  • Ease of implementation
  • Leverage
  • Liquidity1
  • Low commission
  • Low tracking error
  • Customization
  • Confidentiality
  • Leverage
  • Lower funding costs
Considerations
  • Expense fees
  • Tracking error
  • Roll Risk
  • Limited exposure
  • Operational risk / resource to trade
  • OTC
  • Counterparty risks
  • Set-up / documentation
Suitable For
  • Narrow exposures, liquidity1
  • Longer term and shorter term trades
  • Higher turnover, shorter duration trades of popular benchmarks
  • Lower anticipated turnover and longer term trades

1 Shares are not individually redeemable and owners of shares may acquire those from the Funds and tender those shares for redemption to the Funds in creation unit aggregations only, typically consisting of 50,000 shares.

ETFs disclose their full portfolio holdings daily

Common Discussion Questions

ETFs through an Institutional Lense
Complementary or replacement vehicle? Institutions tend not to view the ETF as an "either or" vehicle, but rather a complement to or "in-addition to" existing strategies.
Too expensive? Many institutions that utilize ETFs may justify their higher expense ratios with the convenience of implementation, liquidity1 and flexibility. They may be able to attain index exposure at a lower cost, but in certain instances the ease of implementation outweighs the higher expenses. In addition, some institutions may offset management fees and reduce net exposures through disciplined use of securities lending programs.)
For liquidity purposes or long term exposures? Some institutions are trying to carve out a liquidity buffer in their portfolio and may use ETFs to gain participation in an asset class while remaining liquid. Other institutions may use the ETF to dip their toe into new asset classes. Some institutions may use ETFs to gain exposure to commodities and other real assets.
Only for equity beta? "We use ETFs to gain exposure to equities other than individual large-cap domestic stocks and for bonds, commodities, etc. We want to get the 'pure' impact of the asset classes so we use ETFs versus actively managed mutual funds."2
For large institutions or small institutions? Among institutions with more than $5 billion in assets, more than two-thirds of ETF users cite cash equitization as a primary application. For funds with less than $5bn in assets, cash equitization falls to just 17%. In this group of smaller funds, over half say they use ETFs for tactical portfolio adjustments, and almost half say they use ETFs to obtain exposure to core-satellite strategies.2

1 Shares are not individually redeemable and owners of shares may acquire those from the Funds and tender those shares for redemption to the Funds in creation unit aggregations only, typically consisting of 50,000 shares.

2 Invesco PowerShares does not offer tax advice. Please consult your tax adviser for information regarding your own tax situation.

This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Not all strategies are suitable for all investors. Investors should consider their own (or discuss their) situation and risk tolerance (with their financial advisor) before investing.

Securities lending involves a risk of loss because the borrower may fail to return the securities in a timely manner or at all.

Derivatives including Commodities Futures, Forward Contracts and Swaps are generally volatile and may be subject to risk not associated with traditional investments and may not be suitable for all investors.

Tracking error is a divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark.

Beta is a measure of risk of an asset in relation to the general market or the tendency of a security's returns to respond to changes in the market.

Roll Risk is the risk of not realizing return generated in a backwardated futures market from rolling a short-term contract into a longer-term contract and profiting from the convergence toward a higher spot price upon contract expiration.A backwardated futures market occurs when demand is greater in the near future making contracts with delivery dates in the near future have higher prices than those with delivery dates that are further out.

Basis Risk is the risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This imperfect correlation between the two investments creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the position.

ETFs disclose their full portfolio holdings daily.