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Why and where are managers using ETF's?

 

I have spoken to a number of professional money managers lately regarding ETF’s. My impression is that while it is a fact that ETFs are a $1 trillion global business --- the market has enormous room to grow as most managers I speak with are still not using ETF’s in any way. In the cases where they are, why are they doing so?

1. A particular market segment is attractive but there is no information edge to justify security-selection. Especially relevant in international markets.

2. Liquid access to non-correlating asset class exposure (Gold, Aggregate Bond Index, TIPS, Commodities)

3. Add Yield to portfolio (preferred stocks, inv-grade/ high-yield bonds, emerging market bonds, international treasuries, high-dividend ETFs and/or high-dividend sector ETFs, etc)

4. Alter portfolio beta to enhance return

5. Diversify with some indexes that complement an otherwise concentrated list of best ideas

6. Reduce administrative burden of smaller separate accounts – rolling cash from maturing bonds across long lists of accounts is time-consuming and very low in terms of possible alpha from this task.

7. Macro Calls – express tactical views based on changes in the marco outlook for various market segments (global or domestic).

8. Hedging late in the calendar year with a short (or inverse) position – rather than selling longs --- in order to avoid taxable gains in the current year.

9. Liquidity – try selling individual muni or corporate bonds through a broker and see the bid/ask spreads you are quoted. Index mutual funds are another very viable option here.

10. Pair Trading. Shorting a sector within a list of long individual stocks.

11. Shorting very low yielding long-duration treasuries (see Pimco outlook).



Disclosure: no securities mentioned