Advisors are now for the first time recommending exchange-traded funds (ETFs) more often than mutual funds to their clients, says a Financial Planning Association report released Wednesday.
The popularity of ETFs has been growing steadily in recent years. The “2015 Trends in Investing Survey” shows that 81 percent of advisors currently use or recommend ETFs to their clients. ETFs are the most popular among 17 investment options given in the survey.
Seventy-eight percent of advisors surveyed currently use or recommend mutual funds (non-wrap) with clients.
According to the study, which has been conducted since 2006, ETFs have grown in popularity from 40 percent in 2006 to 79 percent last year and 81 percent this year. The Journal of Financial Planning and the FPA Research and Practice Institute conducted the survey of 303 financial advisors.
The survey also shows that 51 percent of advisors plan to increase their use or recommendation of ETFs with clients over the next 12 months. No other investment vehicle shows that level of anticipated increased usage, FPA says. Twenty-three percent of respondents plan to increase their use of mutual fund wrap programs, and 22 percent plan to increase their use of individual stocks.
“ETFs continue to grow in popularity among advisors and investors, thanks to their traditional cost effectiveness, tax efficiency, transparency, flexibility and liquidity; however, the ETF landscape has become increasingly complex in recent years,” says FPA Practice Management Director Valerie Chaillé, president of SummitView Financial in Indianapolis, Ind.
“It's important for advisors to ensure they fully understand the nuances of the ETFs they're recommending and that their clients understand what they're investing in, as well as the cost and potential risks involved,” she adds.
The FPA says that although smart-beta strategies have gotten a lot of attention, only 22 percent of advisors have used smart-beta ETFs with clients in the last 12 months.
Advisors are moving away from annuities, with 38 percent currently using or recommending variable annuities, compared with 41 percent last year, and a high of 58 percent in both 2006 and 2008.
Although 61 percent of advisors believe a blend of active and passive management provides the best overall investment performance, more advisors increased their use of passively managed funds over the last year (24 percent) than actively managed funds (15 percent).