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ETF-Using Advisors Embrace ‘Smart Beta,’ New Funds

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A survey has found sharp changes in the ways and advisors are using exchage-traded funds in client portfolios.

Respondents of the second annual advisor survey conducted among users of (formerly Index Universe; registration required) with the support of Brown Brothers Harriman included about 50% RIAs, 15% registered reps of broker-dealers, another 15% of professional investors and “a few individual investors snuck in,” said Shawn McNinch, global head of ETF services at Brown Brothers Harriman.

Among the key findings:

  • Advisors are comfortable with newly minted ETFs: 65% said they’d add ETFs with less than a year since launch into portfolios, compared with 50% last year.
  • ETFs are accounting for a larger percentage of advisors’ overall assets under management; 32% of respondents said they had at least half of their total AUM invested in some exchange-traded product, up from 19% last year.
  • Advisors are becoming more open to alternative indexed products; 49% of respondents said they had bought a smart beta ETF over the past year (though 57% said such ETFs accounted for less than 5% of their total AUM).
  • Fifty-nine percent said they would buy a more expensive ETF if it was linked to a major index, down from 67% in last year’s survey.

Combining the survey findings with his own experience, notably at iShares, McNinch said he does see “more adoption of ETFs by advisors over all,” and while advisors adopted ETFs “originally as a cheap way to get beta exposure,” they’re now using them to generate alpha as well.

“It’s a cheap way to get into and out of asset classes,” McNinch said, reflecting advisors using ETPs “more tactically in their portfolios.” He believes that the increase in fee-based platforms has helped drive advisor adoption of ETFs, as has a greater focus on risk management since the financial crisis, pointing out that “you can short ETFs as well, so you don’t have to go long,” thus providing both upside capture and downside protection in a portfolio.

Lower risk tolerance among clients has also led to the creation, he said, of “innovative products that put a cap and a floor to help preserve your capital.”

As for the survey findings that he found most interesting, McNinch highlighted the fact that an ETF sponsor’s “index brand” is becoming less important to advisors, as reflected in the decrease in advisors who are willing to pay a higher price for ETFs based on major indexes.

As more and more “non-pure-beta” ETFs are launched using indexes developed by managers, “the brand becomes less valuable,” and since “it’s the managers coming up with their own intellectual properties, they’re saying ‘I won’t pay such a large indexing fee.’”

McNinch said that “more competition in the index space will drive down the costs” to ETF sponsors, who are currently “paying substantial licensing fees to index providers,” and that development will “ultimately allow them [ETF sponsors] to charge a lower expense ratio,” to the benefit of advisors and end clients, McNinch concluded.

Check out Gene Fama to Keynote 5th Annual Morningstar ETF Conference on ThinkAdvisor.


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