Exchange traded funds (ETFs) were initially created to provide institutional investors with a means to equitise these cash positions using a fund structure backed by physical securities (as opposed to using derivatives). Instead of having a significant cash position, investors can select an ETF that closely approximates their target market and risk exposure. This enables the investor to remain fully invested and minimise the risk of performance shortfalls in rising markets.
A cash equitisation strategy through ETFs is useful for institutional investors who are transitioning assets between managers. It remains a common rationale for ETF use, and is arguably more important than ever when yields on cash assets are close to zero.