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If you believe the numbers, all signs point to more institutional use of exchange-traded funds (ETFs). In November 2012, BlackRock reported that roughly 40% of institutional investors are using ETFs for core allocations. Even more of an eye-opener is the fact that the number of survey respondents who say they’ve never used ETFs has dropped precipitously, down to 15% from 25% last year.

Those are some impressive statistics. But dig a little deeper and you’ll still find a big disconnect between providers and the institutional investors they’re targeting. According to a recent article in Pensions & Investments a lot of institutions, including pension funds, have yet to jump aboard the ETF train because providers haven’t done a good enough job of reaching out to them.

The trouble lies in the index: off-the-shelf products based on widely used indexes are an issue for big investors with complex needs and screens. So even though investors can choose from a huge range of ETF products—there are over 1,400 in the market right now—most institutions have a hard time making them fit.

Concerns over indexes aren’t new: last year, Vanguard made a big shift away from MSCI in favour of a new set of benchmarks from FTSE and the University of Chicago. But is it enough? As providers take a closer look at the underlying indexes in their products, some argue that they need to go deeper to address issues for institutions. That means providing custom solutions and indexes tailored to the unique needs of those large investors like pension funds and endowments.

As Kevin O’Keeffe, managing director at Russell Investments told Pensions & Investments: “We constantly get requests for custom hedges, different currencies, removing countries or sin stocks, for example.”

At the end of the day, providers need to be flexible around strategy and product structure to pull in pension clients otherwise ETFs will remain on the fringes in the institutional space. Providers will need to bring their game to the pension space by listening to what plan sponsors want and need, and work with them to create something that works best for the plan.

Caroline Cakebread is editor of Canadian Investment Review and based in Toronto.
© Copyright 2014 Rogers Publishing Ltd. Originally published on benefitscanada.com

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