2022 Perspectives for the Public Sector

20 Why ETFs are relevant for institutions ETFs are characterized as passive products and while it is true that the majority of ETFs are index trackers, it does not mean that ETFs are only being used in passive ways. ETFs have evolved beyond traditional portfolio construction and have become important tools for transition management, hedging, cash management and liquidity management, as well as dynamic tactical positioning (figure 3). The following examples show how ETFs are being used in a variety of circumstances by public sector institutions: • Pension funds A pension fund was transitioning $650 million of emerging market equities held in three separate legacy manager portfolios into three separate target manager portfolios. Total trading was in excess of $700 million across 2,600 lines of emerging market stocks and the client wanted to avoid being uninvested during the transition window between liquidating and funding the new managers. Citi used an emerging markets equity ETF as part of the transition to maintain beta. This proved particularly effective as markets rose during the period, gaining 12% from the purchase of the ETF to its sale. Having exposure to the market rather than cash created a net profit of over $27 million for the client. • Central banks A central bank had a multi-billion cash investment and wanted to invest it quickly in the corporate bond market under an ESG framework. The client wanted to reduce exposure to external managers, at the same time avoiding the costs of analyzing, executing and safekeeping thousands of individual bonds. They also sought to avoid ongoing management responsibilities, such as coupon reinvestment. Given the size of the trade and its potential market impact, the speed with which individual bonds could be purchased was a concern. At the same time, the central bank wanted to invest in an ESG compliant way, but the lack of a market-wide standard benchmark for ESG scoring made it challenging to develop an in-house ESG framework. The client selected an ESG corporate bond ETF as a way to invest efficiently in a single exchange traded security, while outsourcing the ESG criteria to a third-party asset How Public Sector Institutions Can Use ETFs Source: Bloomberg, Blackrock Europe Figure 2: Trading turnover in UCITS fixed income ETFs FI Industry Turnover (US$) iShares FI Turnover (US$) 800 600 400 200 0 2018 2019 2020