October 25, 2012

Vast Majority of Advisors Will Increase ETF Use in 2013: Guggenheim

Only 16% of advisors cited low costs as the biggest advantage of investing in fixed-income ETFs

Fully 78% of financial advisors surveyed about their use of exchange traded funds at the Morningstar ETF Invest Conference in Chicago this month said they planned to increase their use of ETFs in retail investors’ portfolios in 2013, Guggenheim Investments announced Thursday.

Just 1% of the 55 advisors that Guggenheim surveyed onsite at the Morningstar event said they didn’t plan to increase their ETF usage, and only 16% of advisors cited low costs as the biggest advantage to incorporating fixed-income ETFs into retail investor portfolios.

Convenience and liquidity were listed by 71% of advisors as the biggest advantages of using fixed-income ETFs in retail client portfolios, while 13% named transparency and tax advantages as the biggest benefits.

Tony Davidow, Guggenheim Investments“There is room to grow in the ETF space, and we would argue that it’s in the early games,” said Tony Davidow (left), managing director and portfolio strategist at Guggenheim Investments, at a media roundtable in New York on Wednesday. “We think much of the growth will come from advisors.”

The Guggenheim survey mirrors an independent advisor outlook study released in October by Charles Schwab, which reports that ETFs lead in the type of investment that advisors say they are most likely to invest in more over the next six months. A total of 32% of 839 advisors surveyed said they invested more in ETFs in July, compared with 34% in January. In the No. 2 spot were alternative investments, at 18% of advisors in July versus 19% in January, and in the No. 3 spot was real estate, at 18% in July versus 14% in January.

While advisors told Guggenheim that fees are not their primary concern, fees have nevertheless been dropping throughout the industry, with BlackRock and Vanguard two of the latest to take action. In September Charles Schwab cut ETF fees, some as much as 59%, and Fidelity Investments had waived trading commissions in 2010 and 2011 on a group of ETFs.

Guggenheim, meanwhile, has been building a name for itself as an actively managed fixed-income ETF shop. The firm offers a total of 80 domestic and international equity, fixed-income and currency exchange traded products, but it prides itself on its BulletShares high-yield corporate bond ETFs, which carry an expense ratio of 0.42%.

There’s a good argument to favor actively managed fixed-income ETFs over actively managed equity ETFs, said Davidow along with Guggenheim Director of Product Development Bill Belden at the roundtable.

The “opaqueness of the fixed-income marketplace” creates demand for actively managed fixed-income ETFs, especially now that the supply of individual bonds is less accessible, Belden said. He added that the intraday liquidity and transparency of ETFs lets advisors know the duration of a basket of bonds at any time, which is not the case with mutual funds.

Pointing to the $3 billion in assets recently reached by the PIMCO Total Return ETF, Belden said there was clearly a wide demand for active management, especially when it comes from a star manager such as Bill Gross.

“If Bill Gross publishes his holdings on a daily basis, I guarantee you there will be interest,” Belden said.

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