In a survey of investing trends released in June by the Journal of Financial Planning and the FPA Research and Practice Institute, exchange-traded funds were named the top investment vehicle of choice among financial advisors. It wasn’t always that way, but from the launch of the first U.S.-listed ETF in 1993 through today, these products have slowly but steadily gained favor with advisors—83% of whom said they used or recommended ETFs in 2016, up from just 40% in 2006. 2016 is the second consecutive year that ETFs ranked highest among 18 options posed by the annual trends survey. Some advisors use them more than others.
Rose Swanger is the principal at Advise Finance LLC in Knoxville, Tenn., which has essentially become an ETF-only shop. She explains how and why she now relies on ETFs for her clients’ portfolios.
Schlegel: Please describe your practice, your client base, and your role with them regarding their investments.
Swanger: I have personally managed all my clients’ assets for many years. Until recently, I started to add some third-party managers for some clients’ portfolios to comply with the upcoming Department of Labor fiduciary rules.
My clients are from all walks of life, from doctors to truck drivers. But I aim at the mass affluent, whose investible assets range from $150,000 to $1 million.
Schlegel: When did you start using ETFs?
Swanger: I experimented with ETFs for my own portfolio in 2008. Once I became familiar with them, I started to add ETFs in my clients’ portfolios in 2011. I like to use analogies to describe nebulous and difficult investment terminology to clients. So when I explained my portfolio design to them, I described ETFs as sort of like the fraternal twins to mutual funds. They invest in the same assets, but ETFs offer much more advantages such as trading flexibility, lower expense ratios, etc. Clients understood how mutual funds worked, so there wasn’t much surprise or resistance to the switch to ETFs.
Schlegel: What did you primarily use before you switched to ETFs?
Swanger: Mutual funds. I now have only one client with mutual funds. He has four funds—and they’re all really good funds that are closed to new investors. I’m debating whether or not to change those over to ETFs. Other than that, all of my clients use ETFs right now.
Schlegel: What is the attraction of ETFs?