ETFs not suited to institutional investors

Institutional investors have been warned against long-term investment in exchange traded funds (ETFs).

A new analysis issued by Watson Wyatt has claimed that while the development of the ETF sector has driven a great deal of product innovation, institutional investors should be considering ETFs in the same context as alternative investments.

It said this was because ETFs generally had higher fees than institutional index products, might have tax implications that required specialist advice and often contained counterparty risks for which investors might not be compensated.

Commenting on the research, Watson Wyatt senior investment consultant Chris Sutton said while ETFs were to be applauded for their substantial innovation and the way they had opened up a world of potentially interesting market exposures, the case for inclusion in institutional investment portfolios was not yet obvious.

He said the Watson Wyatt analysis suggested there were a good range of institutional passive products available in most markets that were cheaper than many ETFs.