ETFs have seen significant growth in 2024, with assets increasing by $1.4 trillion, or 16.8 percent. That includes net flows totaling $526 billion, which represents an organic growth rate of 6.5 percent.
As impressive as those numbers are on their own, there’s more to come in the coming years as advisors become more comfortable and ramp up their allocations to the products, according to new research by Cerulli Associates.
In its latest report, Cerulli said nearly all financial advisors, approximately 90 percent, now use ETFs in some capacity. That growing preference has been driven in part by a reported difficulty in identifying active managers who consistently outperform index-based strategies; 61 percent of advisors, including 80 percent at independent RIAs, agree or strongly agree that it is challenging to find active managers who can deliver consistent returns above benchmark indexes.
The trend toward ETFs is also increasingly fueled by a shift in product versatility and diversification. As Cerulli notes, asset managers have been cloning mutual fund strategies into ETFs and other vehicles. That rebalancing in investment products has helped ETFs outpace mutual funds: from just 4.6 percent of advisor-managed assets a decade ago, ETFs have grown to represent 14 percent of all assets managed by advisors.
Advisors surveyed by Cerulli expect this trend to continue. The consensus view is that mutual funds will see the greatest drop in allocations over the next two years, with an anticipated decline of 4.7 percentage points. Conversely, ETFs are expected to gain 3.8 percentage points, potentially accounting for 25.4 percent of assets by 2026.
For 82 percent of advisors, the role of passive in reducing overall portfolio fees is crucial, with two-thirds of advisors considering passive options essential when acting in a fiduciary capacity – though it's not necessarily so black and white.
Still, advisors are just as adamant that active management has its uses, with 83 percent of advisors agreeing that active managers are suitable for specific asset classes, and 72 percent believing that active managers can provide downside protection in volatile markets. Cerulli expects active ETF usage to rise, particularly among hybrid RIAs who allocate the highest percentage of assets to these funds.
“Asset managers distributing active ETFs should include educational material in their sales strategy to justify the higher expense ratios of actively managed funds,” Cerulli said.
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