New tack with tactical allocations an eye-opener

New tack with tactical allocations an eye-opener
Study shows institutional investors have moved beyond thinking 'active or passive' when using ETFs; a learning moment?
MAY 22, 2012
By  John Goff
Advisers interested in tactical allocations can take a page from the playbook of large institutional investors. Institutions increasingly are turning to exchange-traded funds to make their tactical bets on broad markets and specific asset classes, according to a new study by Greenwich Associates. The study found that 57% of institutions are using ETFs to make tactical bets, up from 50% in 2011. “It's no longer about the ‘active versus passive' debate,” said Loc Vukhac, head of iShares' asset management and hedge fund group. Instead, institutions are using ETFs, which are predominately passively managed and track a benchmark, to make active bets intended to help the managers outperform benchmarks. Liquidity is the main reason institutions are turning to ETFs for tactical purposes. With ETFs, an institutional manager can overweight an asset class and move in and out relatively easily. For instance, if a managers thought that Japan was oversold following 2011's earthquake, they could have bought a Japan-focused ETF in a single trade and held it until they felt it was properly valued. If managers had tried to buy the securities individually, the strategy would have incurred far more transaction costs. If they had tried to buy a Japan-focused mutual fund, getting out would not have been as smooth. “It's detrimental to a mutual fund to have investors going in and out quickly,” said Sue Thompson, head of iShares' RIA group. “If an adviser tried to do that, they'd likely have their hand slapped by the fund company and not be able to get back in,” she said. While the liquidity is what makes the tactical moves possible, when it comes to picking an ETF, cost is still king. Almost three-quarters of institutions rated the expense ratio as the most important criterion in selecting an ETF, according to the study. There are other factors that can affect ETF cost beyond just the management fee, Ms. Thompson said. The liquidity of the ETF, its ability to track its benchmark and tax efficiency are important considerations, as well.

Latest News

SEC Says Game Service Roblox Part of ‘Active Investigation’
SEC Says Game Service Roblox Part of ‘Active Investigation’

Short sellers previously said the company was under investigation, though Roblox denied allegations.

Musk’s DOGE descends on CFPB with intention to shut it down
Musk’s DOGE descends on CFPB with intention to shut it down

The Consumer Financial Protection Bureau is in the crosshairs of the Republican group that is widely attempting to dismantle government agencies.

Advisor fighting Finra banishment loses $17.7 million dispute with old firm
Advisor fighting Finra banishment loses $17.7 million dispute with old firm

National Securities Corp. sued the advisor in 2020, alleging breach of contract and unjust enrichment.

Job numbers, inflation leaving room for Fed to hold rates
Job numbers, inflation leaving room for Fed to hold rates

Recent data support a measured pace by the Federal Reserve for the year ahead.

Private assets remain hot despite surging stock market
Private assets remain hot despite surging stock market

Financial advisors are still adding alternatives despite the surge in publicly traded stock prices

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.

SPONSORED Why wealth advisors should care about the future of federal tax policy

Blue Vault features expert strategies to harness for maximum client advantage.