How Institutional Investors Are Reshaping the ETF Industry

Texas holds ’em … Assets, that is.

Earlier this month, filings revealed that a Texas sovereign wealth fund was responsible for growing State Street’s Private Credit Fund (PRIV) by $740 million in the first quarter, a high-profile example of how institutional investors are reshaping the wealth management landscape as more mutual funds, insurance companies and banks enter the rapidly growing world of ETFs. A large portion of PRIV’s growth occurred on a single day in February, when assets ballooned from $100 million to nearly $500 million, much of that stemming from the Texas fund, according to a Bloomberg report. 

“Now that institutions are more comfortable with ETFs, and now that they can get that targeted exposure, we are seeing more instances of ‘Oh, hey, we want to get that exposure within the ETF,’” said Dave Mann, head of ETF product at Franklin Templeton. “It’s almost like all options are out on the table to go talk with institutions.”

Nothing New?

Institutional investors have always been a part of the wealth management landscape, and state public pension plans and hedge funds have a long history of using ETFs. What’s new is the level of involvement, which can influence holdings and strategy, as well as the increase in active fund adoption, Mann said. “Now that ETFs [are] so well ingrained as an investment strategy, there’s more opportunities for [institutions] to say, ‘OK, we will help support an active strategy, or we will help support a lower-AUM fund,” he added. Another reason for increased institutional involvement is the rise in so-called “anchor investors,” which Mann defined as those holding more than half of a fund’s assets.

According to recent data from Cerulli:

• Institutional owners have nearly doubled their ETF usage over the past five years, with assets hitting a high of $337 billion last year.
• Nearly half of institutional ETF users expect to increase their ETF allocations over the next two years.

Anchors Aweigh. But it’s not just institutional investors getting in early on certain ETFs as anchors. Although that constitutes one camp, Mann said, the other consists of institutions seeing an interesting strategy and wanting to support it after the fact. The institution will say, “‘Hey, we noticed you have this active strategy, and we’re watching it,’” he said. “Once it starts hitting some milestones or track records, sometimes an AUM threshold … institutions come in for size.”