After spending years tinkering at the edges of their portfolios with ETFs, Australian institutions are starting to fully embrace the investment vehicle, according to industry insiders.
Speaking to InvestorDaily, BlackRock Australia head of iShares Jon Howie said formerly "secretive" superannuation funds are beginning to approach BlackRock for advice on ETF execution.
The typical adoption process for institutional investors when it comes to ETFs starts with big, massively liquid US-listed ETFs that are traded at the "fringes" of the portfolio, Mr Howie said.
"They do that for about a year, and then they start to trade the less liquid ETFs," Mr Howie said.
"Then they start to trade European high-yield or emerging-market hard currency debt ETFs. Once they’ve done that, they start to construct whole portfolios out of ETFs."
BlackRock is having much more interaction with institutional clients as they start to ask for advice on trading less liquid ETFs, Mr Howie said.
MSCI head of ETF client coverage, Tim Bradbury, told InvestorDaily that factor indexing or 'smart beta' ETFs have started to look compelling for institutional investors that have traditionally used active managers.
"We’re seeing it being done increasingly at the institutional level," Mr Bradbury said.
"Big pension funds and the big MySuper platforms are saying we can effectively capture that at a third of the price of what we’re spending on [traditional active fund managers]," he said.
Retail funds such as those run by ANZ are "definitely" using ETFs, Mr Bradbury said – and industry funds like Local Government Super and the Energy Industries Super Scheme (EISS) are also using ETFs in their funds.
"We’re starting to see the institutions saying maybe we can use those because price is coming down, and futures are a hassle for a lot of firms to manage," he said.