Financial advisors are expected to continue ramping up their ETF allocations in 2020, according to research from financial data provider Broadridge Financial Solutions.
Matthew Schiffman, principal for Distribution Insight, Broadridge Financial Solutions.
Broadridge surveyed 513 financial advisors in the United States with more than $10 million in assets under management and at least 10% already invested in ETFs.
It found that 83% of respondents increased their asset allocations to ETFs over the past two years.
Furthermore, nearly three-quarters (73%) say that they anticipate that their allocation to ETFs will continue to increase in 2020.
The primary driver of growth appears to be cost savings with half (49%) of advisors stating low cost as a reason they are planning to grow their ETF allocations. Other benefits cited include tax efficiency (cited by 17%) and diversification (13%).
Active mutual funds losing out
Growth in ETF allocations will continue to come at the expense of active mutual fund managers with 55% of advisors that are planning to allocate more to ETFs in the coming year noting that they plan to shift assets away from actively managed equity mutual funds. Fifteen percent plan to shift assets away from individual stocks, followed by passive equity index mutual funds (14%), cash and equivalents (9%), and bonds or fixed income mutual funds (5%).
The likelihood of an advisor shifting from actively managed funds to ETFs appears to higher among younger financial advisors, with 64% of advisors under the age of 40 planning to make this change.
Matthew Schiffman, Principal for Distribution Insight at Broadridge Financial Solutions, commented, “As asset managers continue to engage with the next generation of financial advisors, it is critical for them to consider the wind change occurring in product flows.
“Advisors planning to allocate more assets to ETFs next year are most likely to pull away assets from actively managed funds, and it’s a shift that’s likely to become more pronounced over time as lower fee ETFs continue to draw investors away from higher-cost investments.”
The research also confirms insights from a separate study conducted by Broadridge which found that many advisors are beginning to view non-transparent actively managed ETFs as a viable alternative to similar open-end mutual funds.
In that survey, 83% of respondents stated that they hoped that their favourite active mutual fund strategies would become available in ETF format. This trend may help set the stage for the next wave of growth and innovation in ETFs.
Actively managed non-transparent ETFs are moving closer to launch with the US Securities and Exchange Commission granting approval in 2019 for the introduction of Precidian Investments’ ‘ActiveShares’ structure.
ETF usage
According to Broadridge, the latest survey also uncovered notable variations in ETF usage among advisors, highlighting an opportunity for asset managers to rethink their distribution models.
Thirty-six percent of advisors use ETFs primarily for core positions, although usage varies by AUM and channel. Broken down by advisor channel, RIAs are the most likely to use ETFs for core portfolio positions (52%), followed by wirehouse advisors (36%), and independent broker-dealers (IBDs)/regional advisors (31%).
Meanwhile, nearly half (48%) of larger advisors (defined as those managing assets of $500m or more) use ETFs primarily for core positions.
Heavy ETF users (defined as having over 40% of AUM in ETFs) are more likely to be found within the RIA channel (44%) compared to IBD/regional and wirehouse channels, at 23% and 14% respectively.
“While assets have shifted into ETFs across the investment landscape, adoption by advisors is not equal across channels, nor is the way advisors research and make decisions for clients,” added Schiffman. “This has important implications for asset managers in terms of product development, distribution, marketing, and overall advisor engagement. No one-size-fits-all approach exists, but there are clear opportunities for managers to establish mindshare around new products, including non-transparent active ETFs and thematic ETFs.”