Blue Chip Issue 96

BLUECHIPINVESTMENT |

BLUECHIPINVESTMENT | ETFsThe liquidity advantage: why ETFsshould play a bigger role in institutionalasset allocationAs the investment landscape becomes more complex and cost-sensitive, ETFs are proving to be a powerfultool for modern portfolio management.Institutional investors are increasingly incorporating ExchangeTraded Funds (ETFs) into their portfolios, attracted by their costefficiency, transparency and liquidity.The rise of ETFs in institutional investingETFs are gaining traction among institutional investors for severalreasons. They typically have lower management fees than activefunds, which helps reduce total ownership costs. With dailydisclosure of holdings, they offer transparency and clarity aroundasset allocation. ETFs trade throughout the day, enabling realtimeportfolio adjustments and provide built-in diversification byoffering exposure across asset classes, sectors and geographies.Here are some of the other reasons they should be a strongcontender for institutional asset allocation:• Risk management in volatile markets. In periods of marketuncertainty, ETFs offer both defensive capabilities and agility.Institutions can use them to maintain flexibility while hedgingrisk, shifting allocations quickly during downturns. They alsoenable tactical portfolio adjustments, allowing investors toact swiftly on market opportunities without disruptingbroader strategies.• Complementing active management. Rather than replacingactive strategies, ETFs complement them across multiplefunctions. They provide a cost-effective vehicle for implementinglong-term strategic asset allocation (SAA), while also enablingrapid tactical reallocation (TAA) without requiring new managerengagements. ETFs are useful in managing transitions and liquidityand can support dynamic risk management through alternativeexposure strategies for rebalancing or hedging.• Enhancing liquidity for pension funds. For pension funds aswell as insurers, ETFs offer practical liquidity solutions. They actas a “liquid sleeve” – a readily accessible reserve asset that can bequickly liquidated. Institutions stay invested while retainingliquidity, avoiding large idle cash positions. Short-duration bondETFs offer an alternative to cash drag by providing better yield onlow-risk holdings.• Tactical allocation without strategic disruption. ETFs are alsopowerful tactical allocation tools. They enable institutions toquickly over-weight or under-weight specific market segmentsin response to shifts, while still preserving the integrity of theirlong-term strategic asset allocation. This flexibility allows fornimble decision-making without derailing broader investmentmandates and strategic asset allocation.• Cost efficiency and performance. While cost savings are amajor driver, ETFs additionally deliver on performance anddiversification. They closely track indices, enabling efficientbeta capture and more reliable returns. By reducing singlestockexposure, they improve overall portfolio stability. Dailydisclosures and intraday trading ensure greater transparency andexecution efficiency.• Regulatory support and market maturity. South Africanregulatory changes are accelerating ETF adoption. The higheroffshore investment limit of 45% has promoted ETF use for globaldiversification. The new two-pot retirement system aligns wellwith ETFs’ liquidity and transparency. As institutional ETF usagegrows, so too does market liquidity and efficiency, supporting thebroader financial system.Looking ahead: institutional growth and innovationETF adoption is expected to rise over the next decade, mirroringtrends in the US and Europe. Cost pressures and the demand fortransparency will continue to drive growth. Innovations in productofferings – especially systematic strategies such as factor-based andthematic ETFs – are well suited to ETF structures, thanks to theirtransparent, rules-based approaches.As this unfolds, active strategies will continue to play a role but arelikely to evolve. Managers will increasingly focus on high conviction,niche strategies to deliver unique insights. The growth of activelymanaged ETFs offers a blended model thatcombines active thinking with the benefitsof ETF structures. Hybrid portfolios thatcombine passive and active strategies maybecome the norm as institutions seek tooptimise performance and manage risk.ETFs are becoming essential componentsof institutional portfolios. As regulatoryframeworks and investor demands evolve,ETFs are well-positioned to play an evenmore prominent role in shaping institutionalinvestment strategies. Duma Mxenge,Head of Businessand MarketDevelopment, Satrix **Satrix is a division of Sanlam Investment ManagementSatrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this informationat your own risk. Consult your financial advisor before making an investment decision. Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securitiesand an authorised financial services provider in terms of the FAIS. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“theinformation”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information40 and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of orreliance upon the information.

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