The first exchange-traded funds were started more than 20 years ago, but registered investment advisers really started using them only in the past five years.
RIAs' use of ETF products rose 27% annually over the past five years, and accounted for $170 billion of the channel's total assets as of Dec. 31, 2012, according to a new study by Cerulli Associates.
Additionally, 49% of RIA firms surveyed said that they were looking to increase their allocations to ETFs.
"The allocation to ETFs among RIAs grew 48% from 2011 to 2012," Kenton Shirk, associate director at Cerulli, said in a statement. "The RIA channel is an extremely attractive opportunity for asset managers."
In 2008, Dennis Clark, then chief executive of Advisor Partners, was barely using ETFs, mostly tapping into them as a place to park client proceeds during a wash sale before he could re-invest in another product.
At that time that the investment adviser space was still waiting to jump in to the intraday traded funds and that it “doesn't always pay to be an early adopter," he said.
Now, as a managing director at Shelton Capital Management, Mr. Clark said that he is relying on ETFs to populate Shelton's asset allocation models and even placing a covered call strategy on ETF positions.
“Now in every single asset class we have an ETF,” he said.
Part of that success has been the hype around their performance, Mr. Clark said.
Clients saw media attention growing and were hungry for an alternative to “buy and hold” strategies, he said.
Around the same time, fund managers were also homing in on the independent space as a growth area.
“The ETF providers are coming our way,” he said. “Not to mention the advertising budgets and, frankly, the coverage by the popular press.”
Another firm, Miracle Mile Advisors, was founded in 2007 on the basis of using ETFs, according to J.J. Feldman, who works on the firm's investment committee.
The firm's assets have grown to $240 million from $80 million over that time and has about 70% of its assets in ETFs, he said.
“It has been a boon for us,” Mr. Feldman said.
But as the hype grows, so too do the number and types of offerings, which can be a tricky road for retail advisers to navigate.
Last month, the Financial Industry Regulatory Authority Inc. announced fines against Stifel Nicolaus & Co. and a subsidiary for unsuitable sales of leveraged and inverse ETFs.
The products were too complex and illiquid for certain customers, Finra said.
Mr. Salzman said that he avoids leveraged ETFs and uses inverse ETFs only on rare occasions.
As advisers look to use ETFs in new ways, it is still sometimes best to sit on the sidelines, Mr. Clark said.
“There's very likely to be some ETF offerings that are just not meeting the minimum standards of a sound investment strategy,” he said.