The growth in usage and assets of exchange traded funds has been both steady and spectacular. While ETFs can be used by active traders and buy-and-hold investors alike, advisors are increasingly using ETFs in client portfolios.
In its June 27 monthly report, the ICI counted $1.48 trillion in ETF assets in May, up from $1.1 trillion in May 2012, a rise of 37%, invested in 1,200 different ETFs (the first ETF, the SPDR, was introduced in January 1993).
While the cost- and trading efficiency of ETFs, and the ability to expose clients to broad or narrow swaths of the markets is well known, what’s less widely understood is how advisors can build efficient portfolios that meet client needs. According to a Cerulli survey released in May, advisors expect to increase their average allocation to ETFs this year. The survey found that of those advisors using ETFs, most use only a couple of ETFs at most for their clients, and the survey authors warn that even for those advisors who do adopt ETFs, it’s “highly unlikely that they will move to solely using” ETFs and abandon other investing vehicles totally in their client portfolios.
That’s why the editors of AdvisorOne and Investment Advisor and Research magazines are presenting our first ETF virtual conference on Tuesday, July 23. This free event (advisors must register to attend) has already attracted nearly a thousand registrants, with featured speakers like Gary Gastineau, Rick Ferri, Skip Schweiss and keynote speaker Ron DeLegge (left), along with ETF experts from Morningstar, New York Investing and AdvisorShares.
Moderating each of the six sessions (attendees can attend one or all of the sessions, as they wish) throughout the day will be editors from AdvisorOne, Investment Advisor and Research. Moreover, since this is an advisor event programmed by editors, we’re also including a number of your advisor peers who will share with the audience how, when and for which clients they use ETFs (CFPs can also earn up to five hours of CE from the conference, preapproved by the CFP Board of Standards).
So what is the state of the ETF industry, and what is its future? What are advisors doing right, and wrong, when it comes to using ETFs for their clients’ portfolios? Is it a question of either/or when it comes to ETFs or index mutual funds?
We asked keynoter Ron DeLegge, editor of ETFGuide.com who has written about ETFs for Research magazine for nearly a decade, to set the stage for the conference and to describe the environment in which advisors are using ETFs for clients.
Q. Could you give us a sneak preview of your keynote speech? What will you focus on?
A. What I want to focus on is the dynamics of how ETFs have revolutionized the way we manage investment portfolios, but also how advisors can manage their businesses for the next phase of asset growth by building a consistent approach to portfolio building—like Starbucks has done for coffee and McDonald’s for hamburgers.
There’s no reason for advisors to be inconsistent, while being efficient cuts operational risks, creates business efficiency and allows advisors to grow their practices by being in front of prospects instead of being in front of a computer screen, hand-constructing portfolios.
Q. What is the current state of the ETF industry? What can we expect in terms of new products? Will iShares, SSgA, Vanguard remain the dominant players?
A. There are almost 1,300 listed ETPs, managing $1.5 trillion across 18 different managers. Yes, there’s been an increase in ETF upstarts, but 83% of ETF assets are controlled by the big three. That means 35 sponsors are competing for the remaining 17%, including most active [ETF] managers. The ETF marketplace has been focused too much on the next great vehicle; it’s good to be an innovator, but the real money is in distribution.
ETFs are a microcosm of what’s occurred in the mutual fund business where, driven by marketing, there are too many mutual funds. The number [of ETFs] is too many, but that won’t stop product developers.
For advisors, we’ve seen asset growth in ETFs for nine out of the past 10 years. So ETFs are now a mainstream movement, and clients are much less likely to look at them oddly when the advisor talks about ETFs, but there’s also more confusion today than there was a few years ago.