Advisors are increasing their use of ETFs as the foundations of their client portfolios. The result is simpler, more efficient and more inexpensive overall investment strategies, according to recent research.
According to “At The Core: Advisor Views On Investment Trends,” a study released Wednesday by Charles Schwab at the Schwab IMPACT 2018 conference in Washington, D.C., respondents in an August survey of 381 advisors believe that the majority of client holdings, 62 percent on average, should be allocated to core investments. Schwab defines core investments as large-, mid-, and small-cap U.S. equities, international equities, corporate bonds and Treasurys.
Nearly two-fifths of advisors surveyed, 38 percent, believed the core of a portfolio should comprise 70 percent to 100 percent of a client’s holdings.
Omar Aguilar, Schwab’s senior vice president and CIO for equities and multi-asset strategies, said that this was a surprisingly high response given the recent bull market.
“A bull market cycle will by definition try to make more room for non-core investments,” said Aguilar. “Investors will say ‘I have a little more money, I can start playing around,’ and they will try to outsmart themselves. At times of risk, they will go back to the core.”
The product structure most commonly found at the core of client portfolios is now the ETF, comprising 29 percent of the core allocations as described by the survey’s respondents, followed by individual stocks, comprising 25 percent of core holdings, mutual funds, 24 percent, and individual bonds, 18 percent.
Moving forward, 69 percent of respondents expected to increase allocations to ETFs within the core of client portfolios over the next five years, significantly higher than the proportion expecting to increase their use of mutual funds, 53 percent; stocks, 52 percent; and bonds, 46 percent.
“I think ETFs are here to stay, they are the greatest financial invention in our lifetime,” said Anthony Davidow, Schwab’s vice president of smart beta and senior research strategist at the Schwab Center for Financial Research. “They’re helping to democratize investing and they have benefits we sometimes gloss over – you couldn’t really effectively buy 500 stocks with most other solutions.”
Over half of the advisors in the survey, 52 percent, said that ETFs were now the primary investment type within their client portfolios, and 64 percent said that ETFs would be the primary investment product they use in the future. In fact, large portions of advisors are now using ETF- or mutual fund-only portfolios – approximately half of the respondents already use all-ETF or –mutual fund portfolios for their clients, and more than a quarter intend to move clients to ETF- or mutual fund-only portfolios within the next five years.
Younger advisors and female advisors were more likely than their counterparts among the respondents to use all-ETF or all-mutual fund portfolios, according to Schwab. “If you’re building portfolios, your value is now how do I allocate assets versus how do I find assets,” said Davidow. “I think that will continue and persist over time.”