2013 GREENWICH ASSOCIATES GREENWICH REPORT CONFIDENTIAL

GREENWICH
ASSOCIATES
G R E E N W I C H R E P O R T
U.S. Exchange-Traded Funds
Q2 2013
Institutional Investors Relationship with ETFs Deepens
Exchange-traded fund (ETF) inflows from institutions
are poised to rise this year, with half of institutional
ETF users including institutional funds
1
, insurance
companies, asset managers, investment consultants,
and registered investment advisors (RIAs) expect-
ing to increase allocations to ETFs by year end.
Institutional investors continue to employ ETFs in
more innovative ways. Institutions overall are now
evenly divided in reporting their ETF use as strategic
or tactical, with the most commonly-reported usage
being passive exposure in core strategies.
Assets flowing into ETFs are still most likely to go to
domestic and international equity funds; however,
insurance companies and RIAs demonstrate strong
commitment to domestic fixed-income ETFs.
Additionally, all institutional investors use ETFs to
at least some degree to gain exposure to each of the
major asset classes.
L
ast years Greenwich Associates U.S. Exchange-
Traded Funds Study indicated that institutional
investors with experience using ETFs for tactical
portfolio adjustments were finding new and more
strategic uses for the funds. It appears that the success
achieved by these users has begun to attract the
attention of their institutional peers Greenwich
Associates 2013 research reveals that the trend among
institutional investors toward using ETFs for more
strategic applications continues to gain steam.
In the United States, 18% of institutional funds now
employ ETFs in their portfolios, up from 14% in 2012
2
.
Usage is significantly higher among certain types of
institutions, especially among the largest and most
innovative institutional investors. For example, 47% of
U.S. endowments use ETFs, as do nearly a quarter of
corporate and public pension funds with more than $5
billion in assets under management.
Institutional investors also largely plan to expand their
use of ETFs by the end of this year nine out of 10
current ETF users expect their level of ETF investment
to remain stable or increase in the coming year. Half
of institutional users plan to increase their allocations
to ETFs by 2014, including 13% expecting to increase
their use by 10% or more. And more than 40% of
investment consultants, insurance companies and RIAs
expect to increase their usage of ETFs by 1% to 10%
by year end.
A portfolio manager for one U.S. RIA gives this simple
explanation for his firms expanded use of ETFs:
It really was an issue of fiduciary duties to our clients
to look for low cost and pure exposure to specific areas
of the market.
Study Participants
Greenwich Associates interviewed 179 institutional investors
that currently use exchange-traded funds in an effort to track and
uncover usage trends.
Expected Change in Allocations to ETFs by Year End
Increase 110% Decrease >10% Decrease 110% Increase >10%
Note: Based on 166 responses: 56 institutional funds,19 investment consultants,
18 insurance companies, 63 RIAs and 10 asset managers in 2013.
Source: Greenwich Associates 2013 U.S. Exchange-Traded Funds Study
Asset managers
RIAs
Insurers
Investment consultants
Institutional funds
0% 25% 50% 75% 25%
5%
10%
3%
11%
5%
No
Change
50%
44%
32%
43%
42%
32%
44%
44%
10%
42%
11%
21%
20%
5%
10%
9% 5%
1
Institutional funds are dened as U.S. corporate and public pension funds,
endowments, and foundations.
2
Source: Greenwich Associates, based on responses from 970 institutional funds
interviewed between February and April 2013.
2 GREENWICH REPORT CONFIDENTIAL
One Tool, Many Applications
While institutional investors continue to find several
ways to use ETFs to satisfy investment strategy needs,
investors need for passive exposures as part of core/
satellite portfolio models has emerged as a key driver
of ETF demand among institutions. In fact, institutions
participating in the study cited passive exposure in the
core as the most common ETF application. A majority
of insurance companies (72%) and institutional funds
(67%) using ETFs employ these products as a passive
component of their core portfolios. Some of these
institutions likely keep ETFs in their core holdings as
part of a longer-term strategy, while others may find
it useful to employ ETFs for tactical shifts within their
core exposures.
Institutions participating in the study
cited passive exposure in the core as
the most common ETF application.
Regardless of whether they use the core/satellite
model, institutions general desire for passive
exposures has helped increase demand for ETFs as
strategic tools. The director at one U.S. RIA explains
that his firm first used an ETF during a transition
after terminating a small-cap/mid-cap equity manager.
When the firm was unable to find a new manager that
they thought would represent a meaningful upgrade,
they decided to stick with ETFs. Now, he says that in
international equities, fixed income and just about
every area of the portfolio, the firm constantly
The Strategic Shift
When asked to reflect on their purposes for using
ETFs, institutions are evenly divided in viewing their
use as strategic or tactical. Across all institutions
participating in the study, 58% describe their use of
ETFs as generally strategic in nature, a definition based
on either the holding period or a specific application.
Among institutional funds only, 53% describe their use
of ETFs as generally tactical. The same holds true for
insurance companies where 56% of users employ ETFs
tactically. However, among asset managers, RIAs and
investment consultants, 70% say they use ETFs or advise
their clients to use ETFs for mainly strategic purposes.
These results clearly demonstrate that the role of
ETFs within institutional portfolios is changing, says
Greenwich Associates consultant Andrew McCollum.
Although ETFs first entered institutional portfolios
mainly as tactical tools and continue to be used in
important tactical functions, many institutions indicate
they now regularly use ETFs as tools for gaining
long-term exposures and implementing investment
strategies.
A representative of one U.S. institutional fund
explained how this process played out for his
organization:
Initially, it was a transition strategy. It kind of grew
beyond that into a liquidity strategy because it was a
convenient place to have some money in case we needed
cash to pay benefits. It developed into much more of a
diversification plan at this point.
Primary ETF Application
Strategic
Tactical
Note: Based on 172 responses: 60 institutional funds, 21 investment consultants,
18 insurance companies, 63 RIAs, and 10 assetmanagers in 2013.
Source: Greenwich Associates 2013 U.S. Exchange-Traded Funds Study
Asset
managers RIAs
30%
70%
67%
33%
Insurers
44%
56%
Investment
consultants
71%
Institutional
funds
29%
47%
53%
Typical ETF Holding Periods of Institutional Funds
Note: Based on responses from 59 institutional funds in 2013, 62 in 2012 and 45 in 2011.
Source: Greenwich Associates 2013 U.S. Exchange-Traded Funds Study
>2 years
12 years
712 months
16 months
<1 month
2011
2013
0%
7%
12%
20%
24%
24%
19%
19%
26%
25%
15%
15%
36%
36%
21%
2012
0% 10% 20% 30% 40%
GREENWICH REPORT CONFIDENTIAL 3
objectives. One in five institutions using ETFs are also
employing the funds as part of hedging strategies.
The one function in which there was a decrease in
usage was in ETF overlays/liquidity sleeves. After a
pickup in the use of this strategy from 2011 2012, this
years decline is likely attributable to reduced concerns
about liquidity among institutions during a period of
improved market stability. Nevertheless, several institu-
tions discussed ways they use ETFs to enhance portfolio
liquidity. A representative of one institutional fund
related how his institution used ETFs during a transi-
tion from one active international REIT manager to
another:
Subsequent to that, we liked the process enough that we
actually did keep a layer of ETFs in there for liquidity. It
was just easy to get in and out and rebalance, and keep
the portfolio fine-tuned without transitioning/moving
our assets around.
ETFs Play Important Tactical Role
ETFs remain effective tools for tactical portfolio
functions 70% of institutional ETF users employ
ETFs for tactical portfolio adjustments. Institutions
provided several examples of their use of ETFs for
tactical portfolio functions:
[We used ETFs] as temporary holding for assets we were
moving into a new asset class and to give us time to
have a rigorous active management selection process.
Institutional fund
We started implementing ETFs more broadly, especially
in fixed income, as we looked for alternatives to
intermediate-term cash investment options in search of
higher yields.
Insurance company
assesses whether an ETF or some other passive product
could match or beat the performance of their active
managers.
The use of ETFs for several other purposes is becoming
significant as well. For example, 43% of study partici-
pants say they employ ETFs for portfolio completion,
indicating that many institutions now see ETFs as a
way to ensure complete portfolio diversification by
minimizing benchmark risk while maintaining alpha
ETF Usage
Hedging
ETF overlay/Liquidity sleeve
Tactical adjustments
Asset managers
Note: Based on 178 responses: 61 institutional funds, 20 investment consultants,
18 insurance companies, 69 RIAs, and 10 asset managers in 2013.
Source: Greenwich Associates 2013 U.S. Exchange-Traded Funds Study
RIAs
Insurers
Investment consultants
Institutional funds
Rebalancing
Transitions
Cash equitization/Interim beta
Passive exposure in the core
Portfolio completion
67%
50%
90%
72%
80%
51%
90%
35%
61%
51%
54%
80%
80%
56%
45%
59%
70%
40%
56%
62%
36%
50%
40%
50%
46%
59%
40%
70%
89%
78%
16%
20%
20%
50%
41%
10%
20%
5%
33%
33%
0% 20% 40% 60% 80% 100%
Insurance Companies Find
Broad Uses for ETFs
Insurance companies employ ETFs primarily within their
core investment funds, separate accounts and mutual
funds. But like other types of institutions, insurance
companies continue to find new ETF applications over
time. For example, approximately one third of insurance
companies participating in the Greenwich Associates
study are now using ETFs for investing surplus assets,
a quarter use ETFs in annuities and 19% use them in
defined contribution funds.
4 GREENWICH REPORT CONFIDENTIAL
We basically use them as short-term liquidity vehicles to
hedge out a cash position.
Asset manager
We started using ETFs for the equitization of excess cash,
in particular for funds that have frequent cash flows.
RIA
Increased ETF Usage in Fixed Income,
Commodities and Real Estate
Nearly 90% of institutions that use ETFs employ
them in domestic equities, and 74% use them in
international equity portfolios. ETFs are also gaining
traction in fixed income, where 55% of institutional
ETF users invest in domestic fixed income ETFs. As
one would expect, usage of domestic fixed income is
most common among insurance companies at 78%.
Interestingly, 74% of RIAs also employ ETFs in domestic
fixed income.
Decreased fixed-income bond liquidity has driven
institutional investors to explore new ways to access fixed-
income markets, says Matthew Tucker, Head of iShares
Fixed-Income Investment Strategy at BlackRock. Fixed-
income ETFs are increasingly being used by investors to
access liquidity and implement investment strategies.
A vice president of fixed income at one insurance
company says he uses ETFs to help manage what he sees
as a lack of liquidity in some leveraged loans and high-
yield bonds:
If we had time and more flow in the regular market we
could do it without ETFs, but sometimes ETFs seem to
have as much or more liquidity and quicker access.
Fixed-income ETFs are increasingly being
used by investors to access liquidity and
implement investment strategies.
A portfolio manager for a U.S. RIA says her institution
recently began a program switching all individual bond
assets into fixed-income ETF portfolios:
For the past few years, liquidity has not been what it used
to be and coupons are not what they used to be. With
duration concerns, we wanted to be a little more nimble.
We just were not able to do that with the individual
bonds so we started moving [smaller] accounts into
ETFs.
A number of institutions say they were first motivated to
invest in ETFs by a desire to obtain specific exposures
in gold and other commodities. In commodities and in
REITs, RIAs are leading the way in the use of ETFs. As
one RIA put it:
In markets such as commodities, the low trading cost
makes it easier for people with small accounts to get in
and out.
What Do Institutions Look for in an ETF?
Institutions view liquidity/trading volume as their top
priority when it comes to selecting or recommending a
specific ETF 76% include liquidity/trading volume
among the three most important criteria used in picking
an ETF. Also ranked among the most important factors
Proportion of Respondents Using ETFs
in Each Asset Class
REITs
Asset managers
Note: Based on 179 responses: 61 institutional funds, 21 investment consultants,
18 insurance companies, 69 RIAs, and 10 asset managers in 2013.
Source: Greenwich Associates 2013 U.S. Exchange-Traded Funds Study
RIAs
Insurers
Investment consultants
Institutional funds
Domestic fixed income
International equity
International fixed income
Domestic equity
Commodities
13%
0%
19%
44%
45%
79%
100%
81%
94%
97%
59%
80%
62%
83%
87%
36%
30%
38%
78%
74%
26%
50%
24%
39%
57%
8%
30%
43%
50%
64%
0% 20% 40% 60% 80% 100%
GREENWICH REPORT CONFIDENTIAL 5
considered in selecting an ETF are the fund expense
ratio (cited by 68%) and tracking error (cited by 49%).
Relative to these industry averages, asset managers place
less emphasis on expense ratios and pay more attention
to the benchmarks used in specific ETF products.
When it comes to recommending specific ETF products
to their clients, investment consultants pay close
attention to fund expense ratios and tracking errors,
but place less emphasis on liquidity and trading volume.
BlackRock Leads Institutional ETF Market
These selection criteria help explain BlackRocks
dominant position in the institutional ETF marketplace.
iShares ETFs provided by BlackRock are by far the most
commonly used ETFs among institutions. Approximately
nine out of 10 institutions employing ETFs use iShares,
MSCI: Benchmark of Choice
Approximately 40% of institutions say the benchmarks
used in ETFs rank among the top three factors they
consider when assessing individual products. When it
comes to international equity, 88% of institutional ETF
users and 100% of investment consultants name MSCI as
their benchmark of choice for international equity ETFs.
Most Important Factors When Selecting an ETF
(Criteria cited as one of top 3)
Note: *The NAIC does not endorse or recommend any securities or products.
NAIC designations are issued for specific regulatory purposes and these designations
are not equivalent to credit ratings issued by nationally recognized statistical rating
organizations. NAIC designations are suitable only for NAIC members.
Based on 179 responses: 56 institutional funds, 19 investment consultants,
18 insurance companies, 63 RIAs, and 10 asset managers in 2013.
Source: Greenwich Associates 2013 U.S. Exchange-Traded Funds Study
Expense ratio of fund
Liquidity/trading volume
Tracking error of fund
Breadth of ETF offerings
Benchmark used
NAIC* rating
Fund company and management
behind funds
Assets under management of ETFs
Servicing by sponsoring organization
76%
68%
49%
39%
22%
17%
16%
10%
6%
0% 20% 40% 60% 80%
Proportion of Respondents Using Each ETF Provider
Note: Based on 176 responses: 60 institutional funds, 21 investment consultants,
18 insurance companies, 67 RIAs, and 10 investment managers in 2013.
Source: Greenwich Associates 2013 U.S. Exchange-Traded Funds Study
Vanguard
iShares/BlackRock
SPDRs/State Street
PIMCO
PowerShares
Van Eck
86%
69%
57%
31%
19%
9%
0% 25% 50% 75% 100%
including every one of the RIAs participating in the
study, 95% of insurance companies and 90% of asset
managers. Second in terms of institutional usage
is Vanguard, followed by SPDRs/State Street and
PowerShares.
Among these leading ETF providers, Vanguard is cited
most frequently as providing good value. iShares is
cited by institutions most frequently for providing
the industrys most liquid products, the best range
of products, the strongest index tracking, and the
strongest service platform.
Consultant Andrew McCollum advises on the investment
management market in the United States.
Methodology
Greenwich Associates conducted online and telephone
interviews with institutional funds (U.S. corporate and
public pension funds, endowments, and foundations), asset
managers, and insurance companies that identified themselves
as ETF users, as well as investment consultants and RIAs
who said they advise clients to use ETFs. Of the total 179
participants in the study, 69 identified themselves as RIAs, 61
as institutional funds, 21 as investment consultants, 18 as
insurance companies, and 10 as asset managers. The study
was conducted between February and April 2013.
Go to <GARE> on your Bloomberg terminal for information
about this paper and others, and for new subscription options
from Greenwich Associates.
6 GREENWICH REPORT CONFIDENTIAL
RELATED GREENWICH REPORTS
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Speak Louder Than Words (2013)
U.S. Public Funds Pay Up for Possible
Outperformance (2013)
U.S. Endowments and Foundations Plan
New Investments in Alternatives (2013)
Institutions Find New, Increasingly
Strategic Uses for ETFs (2012)
Institutional Demand for Exchange-Traded Funds
Continues to Climb (2011)
The findings reported in this document reflect solely the views
reported to Greenwich Associates by the research participants.
They do not represent opinions or endorsements by Greenwich
Associates or its staff. Interviewees may be asked about their use
of and demand for financial products and services and about
investment practices in relevant financial markets. Greenwich
Associates compiles the data received, conducts statistical analysis
and reviews for presentation purposes in order to produce the
final results
2013 Greenwich Associates, LLC. Javelin Research & Strategy is a
division of Greenwich Associates. All rights reserved. No portion of
these materials may be copied, reproduced, distributed or transmitted,
electronically or otherwise, to external parties or publicly without the
permission of Greenwich Associates, LLC. Greenwich Associates,
Competitive Challenges, Greenwich Quality Index, Greenwich
ACCESS, Greenwich AIM and Greenwich Reports are registered
marks of Greenwich Associates, LLC. Greenwich Associates may also
have rights in certain other marks used in these materials.
NOTES
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GREENWICH
ASSOCIATES
GREENWICH REPORT CONFIDENTIAL
Reprinted with permission of Greenwich Associates, LLC, May 2013.

The information in this reprint is intended to provide insight or education and is not intended
as individual investment advice. We do not represent that this information is accurate and
complete, and it should notbe relied upon as such.

Carefully consider the iShares Funds investment objectives, risk factors, and charges
and expenses before investing. This and other information can be found in the Funds
prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by
visiting www.iShares.com. Read the prospectus carefully before investing. Investing
involves risk, 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. Narrowly focused investments typically exhibit higher volatility. Bonds and bond
funds will decrease in value as interest rates rise and are subject to credit risk, which refers
to the possibility that the debt issuers may not be able to make principal and interest
payments or may have their debt downgraded by ratings agencies.

Asset allocation may not protect against market risk. Shares of ETFs may be sold throughout
the day on the exchange through any brokerage account. However, shares may only be
redeemed directly from a Fund by Authorized Participants, in very large creation/redemption
units. There can be no assurance that an active trading market for shares of an ETF will
develop or be maintained. Buying and selling shares of ETFs may result in brokerage
commissions.

"Alpha" relates to the measure of performance on a risk-adjusted basis.
Cash equitization relates to minimizing exposure to cash while gaining market exposure in
a specific asset class.
Tracking error is a measure of how closely a portfolio follows the index to which it is
benchmarked.

iShares index ETFs are passively managed; they seek to track a market index, before fees
and expenses, and do not attempt to outperform during rising or take defensive positions
during declining markets. iShares ETF performance may diverge from the ETF's underlying
index.

This study was sponsored by BlackRock.

The iShares Funds (Funds) are distributed by BlackRock Investments, LLC (together with
its affiliates, BlackRock). BlackRock is not affiliated with Greenwich Associates, LLC, and
its affiliates. Information on other ETF providers is provided strictly for illustrative purposes
and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any
funds or securities, other than the iShares Funds, that are described in this material.

iShares and BlackRock are registered trademarks of BlackRock. All other trademarks,
servicemarks or registered trademarks are the property of their respective owners. iS-9818-
0513