Asset managers still feel a stigma in using exchange-traded funds (ETFs) instead of picking stocks, but the stigma is lessening, according to BlackRock.

“It’s still there, but is not nearly as much as it used to be ,” said Daniel Gamba head of iShares Americas Institutional Business at BlackRock, as he unveiled a new Greenwich Associates study showing that the explosive growth in ETFs is continuing.

Greenwich Associates, in the report ETFs, an Evolving Toolset for U.S. Institutions, said institutions now are more likely to use ETFs strategically rather than tactically.

“This strategic application is now the number one use of ETFs among institutional investors. The fact that institutions are now using these vehicles to obtain critical investment exposures is just one sign of the building momentum of ETFs,” according to the report.

For instance, Gamba noted that in 2010 only 19 percent of asset managers were using ETFs for core allocations and now that number is 75 percent. He added that 28 percent of pension plans in 2010 were using ETFs for core allocations and today the number is 69 percent.

“The big news is that people are now using this instrument for core allocation, not just for transition or for rebalancing,” he said.

Another indication of the product’s wider acceptance, Gamba noted, is the comfort level investors have in holding it. Institutional investors keep ETFs for longer periods, for example. The difference between tactical and strategic investors is that the latter hold for on average three to five years, he said. By contrast, he said, tactical investors hold an investment in six months or less.

Gamba and other BlackRock officials said that even three years ago ETFs were used sparingly by institutions. However, last year the number of institutions opting for these funds rose to 21 percent, about a 40 percent increase over 2011.

One of Gamba’s colleagues said strategic ETF use has numerous applications  

“We’re seeing an incredible increase in domestic fixed-income use,” said Hilary Corman, managing director and co-manager of asset manager/hedge funds for iShares.

BlackRock, an asset manager investment adviser that sells iSharesETFs, last year had some $40.5 billion in first-time flows and its assets under management have passed the $4 trillion mark, reaching $4.4 trillion on March 31. BlackRock is competing in this growing business with the biggest player in the fund industry, Vanguard, as well as custodian and money manager State Street. Others vying for the ETF bucks include PowerShares PIMCO and Van Eck.

BlackRock officials say institutional investors are often asking why a manager should use ETFs instead of picking stocks or bonds? The report said the three most important reasons were liquidity, mutual fund tracking errors and ETFs' relatively low expense ratios. Gamba estimated the typical liquidity ETF expense ratio at about 20 basis points, which he said “was about the same as an index fund.”

Authors of the Greenwich report interviewed 201 institutional managers using ETFs. The respondents included 49 institutional funds, 32 asset managers, 31 insurance companies, 70 registered investment advisors and 19 investment consultants.

The study noted a few areas in which the ETF growth has been strongest.

“For example,” Greenwich said, “40 percent of U.S. endowments employ ETFs in their portfolios, as do one-third of the largest defined-benefit pension funds (those with at least $5 billion in assets under management) and roughly 25 percent of the largest corporate defined-benefit groups.

“The role that ETFs play in institutions’ portfolios has quickly transformed in five years,” Gamba said. “And all signs point to continued usage and acceptance by institutional investors. We’re actually just beginning with this product.”

In a separate interview, Kris Monaco, head of the International Securities Exchange, ETF ventures, said he generally agreed with the report’s conclusions of continued growth.

“ETFs are bringing access to asset classes and instruments that wasn’t available before. They bring convenience and efficiency, in terms of fees and liquidity,” Monaco said. He added that almost every kind of investment or idea will be offered through ETFs. The next analysis of the ETF should include advisors, who “are increasingly using ETFs,” he added.

How could the lights be turned out on the ETF party?

Monaco said that people “have to be conscious of the past hiccups in new products.”

Gamba said an end to the bull market of the past five years, a wondrous time for stocks, could slow up ETFs. The other obstacle, he said, is a lack of understanding about ETFs.

“We have to educate institutional investors how the ETF works,” he said.

Indeed, Gamba said, said that even sophisticated investors will need some hand-holding to break through the stigmas of using this relatively new product.