ETFs for institutions

Some of the most common institutional investor uses of ETFs include:

• Implementing long-term strategic and short-term tactical asset allocations.
• Getting exposure to specific sectors.
• Hedging against market drawdowns.
• Equitizing cash.
• Helping with manager transitions.

The ability to buy and sell ETFs during the day also makes them potentially attractive for liquidity management.

Some institutional investors use ETFs because they are flexible vehicles that cover a wide range of asset classes and market sectors. ETFs may also use passive index-based approaches, actively-managed strategies, and “smart beta”² approaches that use factors such as value³ and momentum⁴. The asset classes that ETFs and ETPs provide access to include US and international equities, dividend-paying stocks, sectors, corporate bonds, municipal debt, sovereign debt, digital assets, commodities, and currencies.

The potential benefits of using ETFs for institutional investors include:

• Potentially lowering overall fees.
• The ability to trade large positions during the day due to the potential liquidity of ETFs.
• Getting exposure to well-known market indexes.
• Potentially improving transparency because most ETFs disclose their holdings daily.

For institutional investors trading large amounts of shares, it’s crucial to consider the additional costs of owning an ETF beyond just its expense ratio. To calculate an ETF’s total cost of ownership, institutional investors may also want to research bid/ask spreads, premiums and discounts to net asset value (NAV), applicable commissions and brokerage fees, and index tracking error.

The Invesco ETF Capital Markets team can provide support with evaluating the costs of trading Invesco ETFs and can be contacted through the contact form on this page. It’s critical to consider the costs and benefits of ETFs alongside the total cost of ownership and benefits of other relevant institutional investment vehicles, such as collective trusts, segregated accounts, futures contracts, and swaps.

Many ETFs have robust liquidity on the secondary market, where shares of the funds are bought and sold on exchange. Beyond the secondary market, ETFs are created and redeemed “in-kind” — typically in large blocks of shares known as creation units —  based on supply and demand by financial institutions and market makers called authorized participants (APs).

The Invesco ETF Capital Markets team can help evaluate the best way to execute large trades based on an institution’s requirements as well as provide support for creation and redemption mechanics, pre-trade analytics, and secondary market execution. The team can be contacted through the contact form on this page.

When institutional investors want to establish exposure to popular benchmarks like the Nasdaq-100 Index, they have several vehicles to choose from, including ETFs, options, and futures. Calculating the total cost of an investment’s ownership is critical for institutional investors because the difference in just a few basis points can be significant when investing very large amounts.

For example, institutional investors may start by comparing the bid/ask spreads of ETFs and futures contracts for the same index. One advantage of ETFs over index-based futures contracts is that investors don’t need to roll over expiring futures contracts to maintain their exposure like futures, which may result in additional costs. Also, for some indexes, an ETF may exist that tracks the benchmark, while a liquid futures market for that benchmark may not exist.