Treasury Today Country Profiles in association with Citi

Getting to grips with exchange traded funds

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In light of the challenges they face in today’s liquidity environment, some treasurers are looking at the benefits of using exchange traded funds (ETFs) as a means of managing their strategic cash, as well as for liquidity and hedging purposes.

The current challenging liquidity environment has prompted corporate treasurers to think differently about the cash they need on a daily basis. In many cases, this is leading to more conversations about the strategic use of cash, with corporates looking to segment their cash into different buckets based on their short-, medium- and long-term needs.

While many corporate treasurers have tended to meet most of their investment needs using bank deposits and money market funds (MMFs), these challenges have prompted some to look further afield. In certain cases, treasurers are taking a closer look at the opportunities presented by exchange traded funds (ETFs).

As the name implies, ETFs are investment funds which are traded on a stock exchange. As of August 2016, the ETF industry was overseeing assets under management of US$3.4trn, according to EY’s Global ETF Survey 2016, following “a decade of growth averaging 21.5% per annum”.

ETFs have much to offer institutional investors in the current climate. Bill Donahue, Managing Director in Asset Management and one of the leads of PwC’s ETF practice, says that ETFs can be used by institutional investors in various ways. These include cash management, transition management, rebalancing investments, accessing new sectors and markets, portfolio completion, for hedging purposes and tactical adjustments, and as an alternative to using derivatives.

While ETFs might not have traditionally formed part of the investment toolbox for all corporate treasurers, there are a number of reasons why treasurers might consider looking at ETFs in the current environment. “Corporate treasurers recognise that ETFs offer liquidity across various asset classes, a viable solution for cash management, and an effective hedging mechanism,” notes Geoffrey S. Eliason, Chief Operations Officer and Head of Distribution at Peak Capital Management LLC.

How to use ETFs

Ashley Fagan, head of the UK institutional team for iShares at BlackRock, notes that corporate treasurers tend to segment their cash balances when using ETFs so that money market funds continue to be used for the core ‘bucket’ while ETFs can be used for strategic cash. In practice, clients might look for tailored solutions such as a combination of different ETFs, or a combination of ETFs and money market funds to suit their investment criteria or guidelines.

While ETFs can provide a number of benefits, there are also some considerations that treasurers should bear in mind when looking at this type of investment vehicle. For one thing, not all treasurers have their own brokerage accounts set up. “It may be obvious, but the first and most important thing to note is that ETFs are exchange traded and are bought and sold like stocks,” says Will Rhind, CEO and Founder of ETF sponsor GraniteShares. “Many companies do not have the ability to trade in or buy stocks especially private companies.”

However, companies which do not have brokerage accounts may still be able to access ETF. Fagan says that while treasurers in this position may be challenged in terms of how they buy ETFs, “we’ve got over that by offering an implementation service for ETFs, so that’s something we’ve dealt with and been able to help corporate treasurers with.”

Treasurers should also aim to gain a full understanding of ETFs before considering this type of investment. “Tremendous time should be spent understanding the ETF provider, their commitment to maintaining their ETF line-up, the trading and liquidity nuances of the respective ETF, and comparing the underlying holdings of the ETF versus its respective ETF peers,” Eliason explains.

In conclusion, ETFs may not be seen as an obvious choice of investment for corporate treasurers. However, in today’s challenging liquidity environment there may be benefits to keeping an open mind to a broader range of possibilities.

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