Financial advisers may be underutilizing one of today's hottest investment tools and it might be because they're taking the path of least resistance.
Despite a keen interest in embracing ETFs, advisers invest a relatively small proportion of client assets in the funds and don't always take advantage of tools to help parse their complexities, according to an informal survey conducted by S&P Capital IQ at the ETF Virtual Summit earlier this month.
Don't Miss: The latest ETF insights and rankings
Half of the respondents invested less than 20% of clients' assets in ETFs, while only 12% placed 60% or more in the funds, according to the survey. Not surprisingly, the most popular investment tool among advisers was mutual funds, said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ.
One reason advisers might be shying away from ETFs is lack of knowledge, Mr. Rosenbluth said. One sign of this is that advisers often will buy the funds only from one or two companies they know well. For example, an adviser might look only to major issuers like BlackRock's iShares unit or The Vanguard Group Inc., Mr. Rosenbluth said.
Advisers don't have the time to go through six different providers' websites to understand ETFs.Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ.
The majority of financial advisers also shy away from costly ETF research tools, opting instead for material freely available online, according to comments in the survey. S&P Capital IQ provides tools to help investors choose among ETFs.
“There are good facts on ETF providers' websites, but there is not perspective on how that ETF ranks relative to others,” Mr. Rosenbluth said. “Advisers don't have the time to go through six different providers' websites to understand ETFs.”
The result is that advisers aren't making optimal use of ETFs. Fifty-six percent of the advisers surveyed said they choose ETFs based on the simplest characteristic: the expense ratio. Similarly, 58% considered bid-ask spreads to be a key factor. Meanwhile, only 13% said that an ETF's specific securities holdings were crucial, according to the survey.
This means that advisers are often ending up with simple, index-based funds that rarely outperform the market, Mr. Rosenbluth said.
“Just because an [investment product] is cheap doesn't necessarily means it's good,” he said.
Typically, ETFs with the lowest expense ratios also have the most passive approach. For example, the SPDR S&P 500 ETF has an expense ratio of only 0.0945%, but tracks the broad market S&P 500. Meanwhile, Powershares FTSE RAFI U.S. 1000, a “smart beta” fund whose stocks are picked based on fundamentals, has an expense ratio of 0.39% but outperformed the market in 2012 and 2013.
“If you are fine with tracking the S&P 500 index, then maybe you can go for the lowest fees,” Mr. Rosenbluth said. “If you are trying to achieve outperformance, you may have to pay a little more.”
The survey was not statistically significant, with a sample size of only 150, but Mr. Rosenbluth pointed out that it was taken at the ETF Virtual Summit, which most likely was attended by advisers who were more involved in ETF investing than the average.
ETFs vs. mutual funds: understanding the differences
