Whether it's the liquidity, transparency, low cost or something else, financial advisers increasingly are favoring exchange-traded funds over mutual funds.
The
results of a Financial Planning Association survey of advisers showed that 81% are now using or recommending ETFs, compared with 78% for mutual funds.
The findings, compiled from a March survey of 303 financial advisers, are almost the exact opposite of a year ago, when mutual funds were favored by 82% of respondents and ETFs were favored by 78%.
“This is an extremely important turning point, but it surprises me that it took this long,” said Theodore Feight, owner of Creative Financial Design.
Mr. Feight, who transitioned to ETFs from mutual funds in 2003, said he has been preaching the virtues of ETFs ever since to both clients and fellow advisers.
“After 2001 and 2002, I decided we needed to find something that would work better in our clients' portfolios,” he said. “With ETFs, you know if they are doing exactly what they're supposed to be doing, and you can put stop-loss orders on them.”
The survey also found that ETFs led all other categories in terms of where advisers expect to increase asset allocations over the next 12 months, with 51% of respondents selecting ETFs. That was up from 39% last year.
The second most popular category for increasing allocations over the next year was mutual fund wrap programs, at 23%.
Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, attributed the growing appeal of ETFs to the
ever-expanding product line, ease of use and trend toward more customized portfolios.
“I think we're seeing advisers increasingly wanting to build their own portfolios or outsource the building of customized portfolios, and ETFs are a great tool for that,” he said.
Mr. Rosenbluth also noted that there are still limits to advisers' eagerness to dabble in the ETF space.
For example, some of the
more complex smart beta ETF strategies, which go beyond basic index exposure, are still slow to catch on across the financial advice industry.
"Smart beta is a trend people talk about a lot, but advisers are starting with plain vanilla ETFs, because they are still cheaper and simpler to understand,” he said. “As we look down the road, that may change.”
Valerie Chaille, FPA practice management director and president of SummitView Financial, is among the advisers who uses ETFs for her client portfolios, but still keeps it very basic.
“About a quarter of my clients' investments are in ETFs, but I don't use the exotic ones,” she said.
Ms. Chaille, who has helped analyze the findings of the annual survey for the past two years, credits the
proliferation of ETFs for their increased popularity among advisers. But she also credited the six-year bull market run.
“I was taught there are certain investment categories that are better for ETFs because you don't get enough alpha from some active strategies,” she said. “I think the market's performance has been a driver for some of the ETF popularity.”
To others, however, the historic stock market run from the bottom in March 2009 is practically the sole driver of ETF growth.
“In my opinion, it is nothing more than chasing performance, because if actively managed mutual funds were beating the ETFs, then the mutual funds would be more popular right now,” said Tim Holsworth, president of AHP Financial Services Inc.
“We know we're great at chasing yesterday's news; that's what investors do,” he added.
Mr. Holsworth also admits he might be “late to the party” in terms of using ETFs to build portfolios.
“Because I'm not trading, the liquidity is meaningless to me, but you can't argue with the tax efficiency of ETFs,” he said. “The ones that appeal to me are smart beta ETFs that are not just replicating an index.”
