Liquidity and franking credits are important reasons for institutional investors to consider exchange-traded funds (ETF) over futures, according to AIA chief investment officer Graeme Bibby.
Part of the reason why more institutional investors have not taken up these instruments is because their flexibility in asset allocation and ability to trade quickly are underappreciated.
"I don't think [institutional investors] understand the impact of what they are giving up in terms of franking credits and futures," Bibby said.
"Often, [with futures] you are not fully priced for franking credits and you don't have the direct income coming through, whereas with ETFs you do get that."
As an insurance company, AIA's investment portfolio consists largely of fixed income securities, but Bibby uses equity and income ETFs to give a tilt to his weightings.
He also said ETFs allowed him to respond quicker to price fluctuations.
"There was a 7 per cent move on a day recently, and although you don't often see that, you would still see a 1 or 2 per cent move on a day, and if you can decide at a single point in the day that you want to buy at that particular price and finetune your asset allocation, you can do that at your selected price," he said.
"With a fund, you only get the end-of-day price. You don't have the flexibility there."
Russell Investments ETF product development specialist Bronwyn Yates said she had noted more institutional investors questioning the role of futures.
"There is also some performance that you are giving up if they are trading at a premium or a discount at the time that you might be trading them," Yates said.
"We are seeing a growing number of investors and portfolio managers questioning the sole use of futures and whether ETFs are playing a role there.
"What we encourage to think about is not just to bring your whole portfolio into an ETF, but also to think about the smaller slices either from an investment perspective or an operational perspective about some of the efficiencies that you can create.
"There may be some operational efficiencies in putting a part of your portfolio in an ETF from a liquidity perspective, tilting or an asset allocation perspective."
But Bibby said investors should intimately understand the ETFs they were using and there were certain structures he would never use.
"A comment that was raised in a Bank of International Settlements document was that some of the ETFs there have swap agreements underneath, so I understand that there is a product labelling exercise going on and those that are labelled as synthetic have derivative exposure underneath," he said.
"We only consider physical ETFs and we actively educate our investment committee on the type of ETFs which we are in, because some ETFs, particularly offshore, are very complex and almost there hasn't been a day gone by in the last year where a new ETF somewhere in the world has been launched.
"In the US there are ETFs that have hedge funds, or sub-investment grade credit in them, or a swap agreement in them; they are potentially extremely complex."
He said in his assessment of ETFs he looked for structures that had physical asset backing, a solid provider and a clear unit construction process.
"At worst, what could happen is that we could get the delivery of stocks. Stocks are extremely liquid; the less liquid securities, that is where the problem is," he said.
