68% of Institutional Investors Pick ETFs based on AUM, Liquidity & Volume

The world is moving away from the traditional ways of trading on exchanges. Investors today are looking for new ways of investing. This is especially true for institutional investors who are constantly looking for better means of diversifying their portfolios. One of these ways is Exchange Traded Funds (ETFs).

Exchange Traded Funds (ETFs) have become a popular investment vehicle among institutional investors. But their choice depends on the ETF’s underlying characteristics. MoneyTransfers.com has published data from a study that shows that 68% of institutional investors consider Assets Under Management (AUM), liquidity, and trading volumes as key determinants for selecting an ETF.

Why AUMs, trading volumes, and liquidity rule ETFs

Many investors consider ETFs with larger AUMs, volumes, and liquidity as healthy to invest in. A higher AUM is indicative of a large trading volume and, therefore, high liquidity. Higher volumes and liquidity ease trading in the ETF. Moreover, a high AUM enables the fund to spread its costs across the investors, increasing their returns.

MoneyTransfers’ analysis identified six other criteria for picking an ETF. 53% of the respondents said that they’d consider the Benchmark Index. Another 48%  favored the fund’s provider’s brand and market position. Moreover, 46 % based their decision on historical performance.

Meanwhile, 45% would base their choice on the provider’s value-added services. That said, some 34% of the respondents considered management fees a key factor in their selection. Finally, the study identified some 29% of those investors who’d value transaction cost above all else.

Why EFTs are growing in popularity

Market data shows that the global ETF market grew to $10T in 2021, from 2013 figures of $2.28T. It also indicates that many are increasing their appetite for riskier assets. This is because many institutional investors see ETFs as a way to diversify their portfolios without taking on a lot of risks.

An ETF is the institutional investor’s way of hedging their bets. So they want to be sure they can make a profitable move without getting caught in a rut. They’re also likely to have a long-term investment strategy already in place, which means they need to be able to diversify their portfolio over time.

Furthermore, ETFs offer greater flexibility and transparency than, say, mutual funds, which are subject to pricing once a day. Mutual funds also may incur redemption fees if sold sooner than expected. 

About ETFs

An ETF is an investment fund that tracks a particular index, commodity, or basket of assets. You can trade it on exchanges just like stocks as they follow the same rules. But the key difference between ETFs and other funds is that they have passive management. Instead of active managers, they follow specific rules and benchmarks in deciding where and by how much to invest.

ETFs are similar to mutual funds, where investors pool funds and invest them into securities. However, unlike mutual funds, you can trade them on a stock exchange throughout the day. Moreover, investors can use any strategy that they would use for trading stocks with ETFs.

For institutional investors looking at ETFs as investment options, it is important to choose funds with a strong track record and a good performance history. When making their selections, they should also look at the liquidity and trading volume patterns.”