Advisors are continuing to show confidence in the economy, at least if their diminished cash allocations are any indication. At the same time, the popularity of exchange-traded funds is soaring.

These were the findings of a white paper published by technology platform provider Advyzon.

The report, which analyzed the portfolio allocations of about 1,600 registered investment advisory firms, found that the overall cash allocation within a portfolio has been falling since 2020 when it was at 10%. It had fallen to 4.6% by the end of 2023 from 6.7% in 2022, according to the report.

There are a couple of things causing this cash allocation drop. One is investors’ continued concern about higher inflation levels, the report found. Another factor was the expectation that the Federal Reserve would cut interest rates this year. That’s meant money has been flowing out of cash and into longer-term bonds. When interest rates fall, longer-term bonds benefit more than intermediate or short-term bonds because of their longer maturity dates, according to Brian Huckstep, chief investment officer at Advyzon Investment Management.

“If advisors suspect that the entire yield curve is going to go down, it behooves them to be in the longer duration bonds,” he said in an interview. “I believe some people exited cash to move money into longer duration securities with the expectation that the Fed was going to lower rates.”

The white paper also examined the status of ETFs and found that by the end of 2022, they had officially surpassed mutual funds in allocations and enjoyed allocation increases since then. By the end of 2023, advisors had almost 30% of their portfolios allocated to ETFs while the mutual fund allocation was just below 22%, the study found.

Huckstep attributed the growing interest in those products to particular benefits they provide that mutual funds don’t, including tax efficiency. In addition, firms are still churning out new ETFs, he pointed out.

Even traditional mutual fund companies are looking into launching ETFs. With a greater supply, it makes it easier for advisors to access the products for their clients.

As for the different types of ETFs flooding the market, active ETFs continue to grow in numbers as more firms launch them. So-called buffer ETFs are also becoming more popular among advisors as well.

Buffer or defined outcome ETFs protect the initial investment against a certain percentage of loss. To accommodate that buffer, the funds have a cap that limits the amount of upside potential for the fund.

Buffered ETFs are replacing structured notes within many portfolios, the report found. One reason is that buffered ETFs are easier to use than structured notes, Huckstep said.

Finally, the report also looked at alternative investments and found that advisors had 2.3% of their portfolios allocated to them by the end of last year. That’s a drop from 2022, when the figure was 2.7%. 

The report classifies alternatives as liquid funds, including commodity funds, bitcoin funds and gold funds. The firm has another category that it labels “other,” which includes illiquid holdings such as structured notes, interval real estate investments, private credit interval funds, direct cryptocurrency and hedge funds, Huckstep explained.

The allocation in the “other” category did increase slightly, although the report did not provide a specific number.

“Private assets tend to hold up during stock market drawdowns,” Huckstep said, saying these have lower correlations that benefit investors.