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The Role of ETFs

It’s no secret that liquidity is one of the core institutional applications of ETFs. Exchange-traded funds offer multiple layers of liquidity that make ETFs more cost-efficient to buy and trade than their underlying securities. “According to iShares”:, roughly one-third (32%) of institutional funds use ETFs for cash equitization. This figure is similar for Registered Investment Advisors (RIAs) and as high as 50% for consultants.

The same research showed that more than half of institutional funds, insurers and RIAs utilized ETFs for liquidity management. Forty-five percent of asset managers and family offices and 90% of consultants said the same. Institutions have been using ETFs for equitization and liquidity management since the asset class took off two decades ago. It’s not hard to see why.

Don’t forget to check this article to know more about using ETFs as part of your overall strategic asset allocation process.

Rather than carry a significant cash position, an investor can simply select an ETF that closely approximates their target market and risk exposure. By selecting an ETF, an investor can remain invested with minimal risk instead of carrying cash. This strategy is extremely useful for large institutional investors who are transitioning between managers or searching for a new manager. In this case, equitization through ETFs provides an interim solution as investors adjust their portfolios.

Cash drag is especially detrimental when investors believe that market returns will be positive over time. That’s why so many ETFs employed equitization strategies following the financial crisis, a period known as the longest bull market in history. This often outweighs the only real benefit of retaining cash – namely, reducing risk.