U.S. exchange traded fund (ETF) assets continue to rise, according to recent industry data. Assets in ETFs were $1.06 trillion at the end of December 2011, the ETF Industry Association reported, 5% more than the prior year. About 14% of the total assets flowing into ETFs during the year came in December.

The popularity of ETFs is being driven by a variety of factors, but their lower fees are at the forefront. ETFs are highly regarded for providing relatively cost-effective market exposure compared to actively managed mutual funds and index mutual funds. In addition, the structure of ETFs can make them more tax-efficient than traditional mutual funds.

Much of the growth in ETFs is due to advisors’ using them to help clients take advantage of investment opportunities around the world in the equity, fixed income and alternative investment markets, by tapping into useful benchmarks (many not accessible to retail investors until ETFs came along). Today, the most popular ETFs usually track broad indices, but there is an ETF for most every asset class, if not every sector and sub-index. From the most remote geography to the least familiar commodity, an ETF is seemingly available.

ETFs also offer transparency in holdings and operations. Advisors can often see what stocks or other instruments an ETF is holding on a daily basis. The actions of authorized participants whose job it is to create and redeem ETF shares at any time, as market conditions warrant, help ensure that ETF market prices will closely reflect the value of their underlying holdings. Moreover, ETFs publish their calculation of an ETF’s intraday market value based on the current price of the underlying securities. The indicative intraday value, as it is known, has its own ticker and is updated and published continuously throughout the trading day.

According to the latest Rydex|SGI AdvisorBenchmaking report, fees (47%) and specific benchmark exposure (44%) were the most commonly cited reasons for using ETFs in 2011. But trading (35%) and transparency (31%) were cited by about a third of advisors, with taxes (27%) rounding out the top five main reasons advisors use ETFs.

Other data show advisors rely on ETFs to implement a wide variety of strategies. While “core” and “sector” exposures were most common, several other approaches were all within a few points of each other, including: alternatives exposure, directional market positions, factor or asset class exposures and country/region exposure. ETFs provide advisors and investors with attractive options for expressing their investment views, which has likely been a factor in their strong, consistent growth.

Given the increase in assets and the popularity of ETFs, one might expect most advisors to say they were extremely knowledgeable about ETFs and how they can be used in client portfolios. However, data from the latest AdvisorBenchmaking report show this is not the case. Only about half of advisors rated themselves as “an expert” or as “above average” about basic ETF issues, such as liquidity, investment methodology and trading. In the more technical categories—such as ETF structures or calculating the intra-day indicative value (IIV)—the percentage of advisors ranking themselves as an expert or as above average in knowledge dropped to just over a third (35%) and about a quarter (26%), respectively. Between a third and about half of advisors rated themselves as average in all categories. And nearly a third of advisors rated themselves as “basic” or “limited” on IIV calculation, which is a key metric for evaluating ETF pricing.

What methods do advisors seek out when trying to educate themselves about ETFs? ETF provider web sites are the most utilized source for ETF information, indicating such material is useful to advisors. But given advisors’ gaps in knowledge, there appears to be room for providers to deliver more and deeper educational content on key ETF issues. Of the top five education sources for advisors, three are from Morningstar—a testament to the robustness of Morningstar’s content. Yet, here again, one could cite the self-reported gaps in knowledge to suggest that all information providers could be doing a better job in the realm of ETF education. Advisors, too, may need to step up their education efforts and not be

satisfied with average or below-average knowledge. That will be critical if ETF assets are to grow, and advisors expect them to do so, according to the 2011 AdvisorBenchmaking report. The survey 

Most investors are likely to continue to hold a large percentage of their assets in mutual funds, but ETFs are becoming a more acceptable and desirable option. While mutual funds and ETFs may offer a clear advantage in specific situations or with specific clients, both are important asset-management tools and here to stay. Savvy advisors will ensure that they have the knowledge needed to explain ETFs and their benefits to clients to help them meet overall investment objectives.showed that more than half of advisors (54%) report that they will be increasing their use of ETFs in the next three years. That number is down from the 71% level in 2010.