The adoption of ETFs in retail investor portfolios is some way behind that of institutional investors, but financial advisors are working hard to change that.
A new report from State Street’s asset management business State Street Global Advisors reveals that 70% of FAs always or often recommend that clients use ETF strategies, which are already used by 67% of institutional investors who prioritize diversification benefits (65%), cost efficiency (60%) and cash/liquidity management (54%).
FAs are most likely to suggest ETFs due to cost efficiency (44%), diversification benefits (43%) and trading flexibility (43%), while the differentiators between ETFs with similar exposures include track record/performance (58%), lowest expense ratio (54%), and highest liquidity (54%).
Clients are slowly adopting ETFs with a five percentage point increase in 2023 to 45% compared to the previous year and expectation that education will drive further growth of these investment vehicles.
Younger investors are more engaged with ETFs already with 58% of Millennials holding these investments compared to 47% of Gen Xers and just 37% of Boomers. Across generations, diversification is the top reason cited for holding ETFs, followed by access to specific asset classes or exposures, and lower costs/expense ratios.
And their confidence in ETFs appears to be paying off with 65% of those taking part in the research reporting overall portfolio performance while more than half of respondents say investing in the funds makes them better investors.
"There is still growing confidence that ETFs should be a core part of a diversified portfolio," said Anna Paglia, chief business officer for State Street Global Advisors. "The rapid growth and lower cost of ETFs since their introduction over 30 years ago has made it easier for people from all walks of life to become investors.”
However, those that do not hold ETFs report difficulty in understanding the tax efficiencies and costs of investing while 57% say they find it hard to understand the difference between ETFs and mutual funds.
“Despite their popularity, significant investor education still needs to be done to close the knowledge gap about ETFs,” said Paglia. “We know many investors are initially drawn to ETFs for their low cost, but more work needs to be done to raise awareness of all the financial advantages ETFs offer investors, beyond cost.”
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