SOURCE: Barclays Global Investors

Barclays Global Investors

November 25, 2009 09:47 ET

Institutional Users of ETFs Continues to Grow

Latest Data From the ETF Research and Implementation Strategy Team at Barclays Global Investors Reveals the Number of Institutions Reported Holding US ETFs Has Grown by 12% in 2008, According to the Latest Report "US Annual Review of Institutional Users of ETFs in 2008(1)" Released Today

LONDON--(Marketwire - November 25, 2009) - In the four quarters of 2008 a total of 2,657 institutional investors worldwide have reported using one or more US ETFs. Over the past 11 years, the number of institutional users has increased 1,510%. This represents a CAGR of 28.7%.

Institutional investors in 41 countries reported using at least one US ETF in 2008. The United States, the United Kingdom, Canada, Switzerland and Spain have the largest number of institutional users and account for 89%.

Investment Advisors(2) are the largest category of users accounting for 72% of institutional users. The CAGR for this category over the past 11 years is 29.7%.

Use by hedge funds has increased and currently hedge funds are the second largest category representing 16%. Over the past 11 years the CAGR of hedge funds has been 42.3%.

The SPDR S&P 500 (SPY US), iShares MSCI EAFE (EFA US), iShares MSCI Emerging Markets (EEM US) and iShares Russell 2000 (IWM US) are the most widely held ETFs.

Deborah Fuhr, Global Head of ETF Research & Implementation Strategy at BGI, said, "During the market turmoil of 2008 investors became even more concerned about counterparty risk, transparency, liquidity and the use of derivatives and structured products. As a result, the use of ETFs to implement exposure to cash, fixed income, commodities and equity indices became more popular."

Market volatility increased significantly since Lehman Brother's bankruptcy on 15 September 2008. During 2008, the S&P 500 Index moved by more than 5% on 18 days. There were only 17 days with moves greater than 5% in the previous 53 years according to S&P. Equity volatility as measured by the VIX index soared to record levels -- nearly double the prior spikes in 2002 and 1998. The VIX started the year at 23 and ended the year at 40 with a spike of 80 and a low of 15.8.

In addition, over the five year market cycle from 2004 to 2008, the S&P 500 Index outperformed 71.9% of actively managed large cap funds, the S&P MidCap 400 Index outperformed 79.1% of mid cap funds and the S&P SmallCap 600 Index outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003. The script was similar for non-US equity funds, with indices outperforming a majority of actively managed non-US equity funds over the past five years(3).

The Thomson Reuters shareholding database covered 4,633 US institutions reporting on holdings of US$8,884,225 Mn at the end of December 2008.

Over 80% of the largest US institutional investors (those with assets over US$10 Bn) report using one or more ETFs, while less than a third of institutions with assets under US$250 Mn report using ETFs. The overall penetration rate is still very low at 2.8% of reporting institutions.

The reported ETF holdings of US$250,011 Mn at the end of December 2008 account for only 50.0% of the total ETF AUM of US$497,120 Mn at the end of 2008.

Many institutions and retail investors are not required to report their ownership of securities through these sources which Thomson Reuters collects.

The use of ETFs by self directed and retail channels continues to grow. The United States currently has one of the highest usage rates.

Many regulators around the world are reviewing the sales practices, charges, fees and the transparency to retail clients around the world. These changes will increase the use of ETFs in the retail channels.

Notes for editors:

ETF Landscape -- Industry Review is BGI's comprehensive monthly market commentary, which covers Exchange Traded Funds (ETFs) and Exchange Traded Products (ETPs) across the globe. ETFs are open-end index funds that provide daily portfolio transparency, are listed and traded on exchanges like stocks on a secondary basis as well as utilising a unique creation and redemption process for primary transactions. ETPs are products that have similarities to ETFs in the way they trade and settle but they do not use a mutual fund structure. The use of other structures including grantor trusts, partnerships, notes and commodity pools by ETPs can create different tax and regulatory implications for investors when compared to ETFs which are funds. This document includes rankings of ETF and ETP providers, ETFs, index providers and exchanges globally, in the United States, Europe, Japan, Asia, Latin America, the Middle East and Africa, as well as by country. This commentary should not be regarded as a research report.

In the United States the term ETFs is increasingly being used to cover a broad set of products with dissimilar characteristics from those described above including products such as closed-end funds, HOLDRS and notes. These product structures do not fall within the Securities and Exchange Commission's (SEC) definition of an ETF, which is posted on the Internet: "Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs), but that differ from traditional open-end companies and UITs in several respects": These differences can be found at:

Barclays Global Investors is one of the world's largest asset managers and a leading global provider of investment management products and services with more than 2,900 institutional clients and US$1.7 trillion of assets under management as of 30 June 2009. BGI transformed the investment industry by creating the first index strategy in 1971 and the first quantitative active strategy in 1979. BGI is the global product leader in exchange traded funds (iShares) with over 380 funds globally across equities, fixed income and commodities which trade on 16 exchanges worldwide. iShares customer base consists of the institutional segment of pension plans and fund managers, as well as the retail segment of financial advisors and high net worth individuals.

Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing.

Investing involves risks, including possible loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments, investments in smaller companies, and securities focusing on a single country typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise.

Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

The iShares Funds ("Funds") are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as the investment advisor to the Funds. BGFA is a subsidiary of Barclays Global Investors, N.A, a majority-owned subsidiary of Barclays Bank PLC, none of which is affiliated with SEI.

©2009 Barclays Global Investors, N.A. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. iS-1840-1209

(1) The ETF Landscape Annual Review of Institutional Users of ETFs in 2008 looks at the use of ETFs by institutional investors globally who have reported holding one or more ETFs in their mutual fund holding disclosures, or in different filing sources including 13F, 13D and 13G, proxy or other declarable stakes during any of the four quarters of 2008 based on data compiled by Thomson Reuters.

(2) Investment advisors are institutions who manage assets for private clients and institutions.

(3) Standard & Poor's Indices Versus Active Funds Scorecard, Year End 2008