EUROPE - Exchange Traded Funds (ETFs) are not successfully customised, while advance features are underused, a survey of over 100 institutional investors has found.

Presenting the results of the 2008 ETF survey at the EDHEC Institutional Days in Paris today, Noël Amenc, director of French business school EDHEC, said even though usage of the instrument has grown in the last two years it is not used to its full potential and is largely limited to passive holdings of broad market indices.

Almost 80% of respondents use ETFs in equity investments, a lower percentage in bonds, which is "less interesting due to cost issues".

Yet the survey predicts a boom in commodities ETFs.

Cost is still a major issue for pension funds and other institutional investors in their take-up of ETFs with mis-pricing being an issue for 62% of respondents.

According to Amenc, ETFs have won the battle against futures, total return swaps (TRS) and index funds in terms of liquidity, though they lag behind in terms of cost.

"Costs are context specific and for large amounts investors find ETFs favourable to index funds, but for smaller amounts trading costs make ETFs less attractive unless the holding period is long," outlined Amenc.

According to Amenc, institutional investors should realise, however, liquidity comes at a price - ETFs will be a "driving force" in this he predicts.

ETFs are set to grow and overall acceptance and satisfaction with the instrument is high according to the study, however a panel discussion showed large institutional investors are rather doubtful of the instrument's uses.

Wolfgang Weber, the director of asset management and pensions at Sanofi-aventis, said going passive in certain asset classes is very much dependent on the size of the investment.

"The cost is a driving factor" he added, noting "north of an investment between €10-50m we would go for a segregated mandate because it's cheaper".

Nicolas Sobczak, CIO of the French pension fund FRR, also outlined a more conservative stance in ETF investment. According to Sobczak, the FRR uses ETFs for smaller investments: "It happens that we use ETFs to 'test the water', so to speak".

He added futures are the preferred instruments over ETFs though ETFs could play a role in "filling the gaps".

The panel, headed by Günther Schiendl, director and CIO at the Austrian VBV - Pensionskasse - also said there are general concerns of transparency since it is not always clear what is happening behind ETFs.
 
"We want to know what is behind the investments," said Weber arguing particularly exotic ETF variants can lack transparency. He concluded "this could be an argument to be cautious when it comes to less mainstream usages of ETFs".