Although market conditions are in constant flux, one trend that has remained constant is the growing use of exchange-traded funds among financial advisors, as seen in a pair of recent studies that examined the role of ETFs in the allocation decisions being made by advisors.
A study conducted by Charles Schwab found that more than half of the advisors it surveyed (52 percent) currently use ETFs as their primary portfolio management vehicles, and 64 percent of advisors expect to make ETFs the primary investments in future portfolios.
“In less than a decade, we’ve witnessed incredible growth in investors’ understanding of and interest in ETFs," says Kari Droller, vice president of third-party platforms at Charles Schwab. "ETFs have become a foundational part of portfolios constructed by individual investors and advisors, and both groups demonstrate strong appetite for more.”
A parallel study from Brown Brothers Harriman (BBH) surveyed 300 institutional investors, financial advisors and fund managers from around the globe. The results showed a strikingly similar affinity for ETFs. In the U.S., 66 percent of the advisors surveyed hold 11 to 50 percent of client assets in ETFs. Among the global respondents, which included U.S. advisors, 61 percent plan to increase their ETF investments during the next 12 months.
Some of the other key trends shaping the ETF market are fee wars among ETF providers, commission-free ETF trading and the emergence of funds focused on environmental, social and governance (ESG) factors.
ETFGI, a London-based research firm, reported that total assets invested in ESG ETFs and exchange-traded products globally hit a record $25 billion in January 2019. ESG funds are more popular with international investors: European listed ESG ETFs/ETPs account for 56 percent of assets, while those in the U.S. account for 36 percent.
Regarding fee wars, this week saw two actions on that front when Vanguard reduced expense ratios on 10 ETFs, and Social Finance Inc. filed with the Securities and Exchange Commission for two zero-fee ETFs..
Meanwhile, the battle among large brokerage platforms for ETF assets continues as both Charles Schwab and Fidelity Investments this week expanded the number of ETFs trading commission-free on their respective platforms to more than 500 products. Fidelity now has more than $380 billion in ETF assets under administration, up nearly 80 percent over the last three years, while Schwab has grown its self-branded ETFs to more than $115 billion in assets.
The Schwab ETF study found that trading ETFs without fees or commissions was an important factor for both advisors and individual investors. For investors, 64 percent said that commission-free ETF trading mattered, and that number was 70 percent for advisors. This represented a substantial jump from just a few years ago when less than 40 percent of each group cared about commission-free ETF trades.
In the BBH study, one of the interesting findings is that investors aren’t afraid to put money into newer ETFs with meager assets. Among U.S. advisors, 36 percent said they were willing to buy new ETFs with less than $24 million under management. Meanwhile, just 8 percent admitted to not having a “rule of thumb” for minimum AUM before buying new ETFs. Over the past few years, larger asset managers have shown a higher commitment to their own funds by self-seeding new ETFs. The end result has been a higher level of confidence in ETFs by investors, even with unestablished funds that have alternative investment strategies.