Institutional investors are increasingly turning to exchange-traded funds for their investment needs, according to a Greenwich Associates study. And the ETF creators at BlackRock's iShares operation are basking in that attention.

The study, albeit sponsored by iShares, found that a significant number of institutional investors use ETFs for manager transitions, allowing them to keep their assets invested rather than having them dormant, and cash equitization management, allowing them to temporarily park their money in the stock market until they make a long-term investment decision on what asset or assets to hold.

All told, 78% of asset managers and 44% of pensions, foundations and endowments use ETFs for cash equitization, and 61% asset managers and 55% of institutional funds use ETFs for manager transitions.

Not surprisingly, the Greenwich Associate study identified iShares as the most widely used ETF provider by institutional investors. Among 80 corporate pensions, public pensions, endowments and foundations, nearly 90% of institutional investors and asset managers identified iShares ETFs as among their portfolio holdings.

At a media breakfast, Daniel Gamba, head of BlackRock's Americas iShares business, said the firm's momentum with institutions using ETFs has grown dramatically. According to Gamba, more than half (54%) of the firm's ETF clients are institutions such as asset managers, pensions, foundations and hedge funds, insurance companies and banks.

"More and more institutions are overcoming the stigma of using ETFs in taking active positions," he said. "Institutions have difficulty showcasing to their clients their usage of ETFs but clients are getting more comfortable. They're looking at ETFs as a way to create portfolios as opposed to another passive fund that they own."

He added that credit and emerging markets are areas where institutions have been using ETFs, as well as in high-dividend equities.

Loc Vukhac, head of the iShares Asset Management and Hedge Fund Group, said high yield is on the mind of every institutional client the firm is currently dealing with. What one ETF, known as the iShares iBoxx High Yield Corporate Bond (HYG) fund, "represents ultimately is the first cash bond index available as an investment tool for the professional institutional management community," he said.

"Credit alpha managers are used to conducting business via phones and what credit ETFs represent is the ability to transact cash bonds on an exchange," said Vukhac.

According to Vukhac, the number one fixed income gatherer in 2012 bringing in $3.8 billion as of April 30 is HYG, which invests in high-yield corporate bonds. "We are seeing accelerating institutional adoption of iShares credit ETFs. This is no longer an active versus passive debate," he said.

He said HYG's trading volume is up 250% or $250 million in notional average daily volume as of the end of May 2012, compared to the previous year. "Institutionals are quite surprised they can trade $25 million and $50 million in notional trades in HYG on a regular basis,'' he said.

Sue Thompson, head of the iShares Registered Investment Advisor Group, said advisors are growing at an outsized rate since 2008. According to Thompson, boutique RIAs have seen phenomenal growth, to more than 100 boutique managers totaling $46 billion in ETF assets this year versus only 25 managers with $5.8 billion in assets in 2008.

"That's a 650% increase that we've seen just since 2008. This space is one of the most incredible that I've personally ever witnessed in my career in financial services over the past 15 years or so,'' she said. "Boutique asset managers focused on ETFs are growing at an outsized rate.''

ETFs have grown from their initial targeted audience of institutional investors to recent adoptees in the form of advisors and retail investors who "found ETFs to be incredibly important vehicles to access beta in a liquid and less expensive way," Liz Tennican, Head of Institutional Sales, iShares, said.

"As highlighted by the credit crisis in 2008, we saw institutional investors come back into the market and increasingly use ETFs because they saw ETFs as liquid vehicles," she said.

"It was during this time that we saw an inflection point. Institutions would call a bond desk and couldn't get anybody to pick up, much less give them a market in either direction,'' Tennican said. "But we saw our fixed-income ETF suite continue to trade throughout at 2x to 5x the volume that it had previously."

Tennican added that pensions and endowments have always used ETFs in tactical ways for transition when they had to fire a manager but they haven't found another manager they want to hire. "We have seen liquidity rise to a governance issue in the minds of our institutional investors. It's gratifying to see institutions think about how to use ETFs in a much more strategic way."

She also advised institutions to really have to look at the all-in cost of the ETF taking into account not only the management fee but other ancillary factors such as trading costs and security lending.

"All of a sudden this simple vehicle is a little bit more complicated but therein lies the beauty because if you are an institutional investor, you really have to think about how you can use that EFT in your portfolio," she said.

In recent years, BlackRock has built a capital markets team that sits in San Francisco and New York, to advise clients for free on how to use ETFs.

"We'll run trade cost analyses for them taking into consideration the management fee, market impact, taxes and all-in costs of executing their exposure in an iShare,'' Tennican said.

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