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Institutions Love ETFs, Shouldn’t You?

One of the easiest money-making strategies for a regulator investor to employ is to follow the smart money. Whether you choose to track insider buying at a particular company or research the favorite holdings of legendary investors such as Warren Buffett and T. Boone Pickens, there is something to be said for being a copycat and following the smart money.

Sure, the pros aren't perfect and they have some trades that can be considered turkeys just like the rest of us, and it is rare that you'll get prices on a stock or ETF that are as good as what they get, but trust me when I tell you that are many more risky and less profitable ways to invest than following what the big boys are doing.

That's why I consider a report released by Greenwich Associates on Monday a big deal. The report is eight pages long, but I can sum it up for you with one quick statement: Big institutions and money managers are increasing their use of ETFs. While that isn't an invitation to go out blindly buy 100 different ETFs without doing your homework, it is a ringing endorsement of the asset class at large.

Nearly one-half of the asset management firms and one-third of the institutional funds taking part in the study of current institutional ETF users plan to increase the share of portfolio assets they invest in ETFs over the next two years, according to Greenwich Associates. The study goes on to highlight the fact that once institutions get involved with exchange traded products, they tend to INCREASE use of those products over time.

Why is this study worth noting? Simply put, Greenwich Associates didn't survey a bunch of minor league money managers that run paltry amounts of money. No sir. In the firm's own words, the study is based on interviews with 45 institutional funds, including corporate pensions, public pensions, endowments and foundations, as well as 25 large asset management firms in the U.S. Combined this group has a whopping $7.5 TRILLION in assets under management.

Not yet convinced? To quote "Family Feud," the survey says half of those surveyed plan to increase ETF allocations by 5% and not a single respondent plans to reduce ETF allocations over the next two years.

We're talking about major pension funds and college endowment funds, among others, here. As I said earlier, everyone, even Warren Buffett, has a losing trade now and then, but endowment and pension fund managers aren't in the business of losing money.

If you want a great example of a prestigious endowment fund using ETFs, look no further than Harvard. Literally the smart money. This is the largest university endowment fund in the U.S. and the fund has held stakes in plenty of emerging markets ETFs including funds that track Brazil and South Korea, among others.

For those investors that are unfamiliar with ETFs, now is the time to at least dip your toes in the water. After all, it looks like the smart money crowd, at least some of them, are doing cannon balls into the ETF pool.

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