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RIAs’ Use of ETFs Continues to Climb: Schwab Study

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While a greater percentage of registered investment advisers are using exchange-traded funds in client portfolios—with more than half (52%) saying they’ve increased investments in ETFs in the past year—most RIAs see ETFs as just one tool for an effective investment strategy, according to Charles Schwab’s just-released 2016 ETF Investors Study.

This is the first year that Schwab gauged RIAs’ use of ETFs, polling 312 RIAs registered with RIA Database who have bought or sold an ETF in the last two years.

RIAs currently hold an average of 33.9% of investments in ETFs, and they indicated that could increase to an average of 44.4% in five years. Of the 52% of RIAs that said they increased investments in ETFs over the past year, 12% said those increases were significant.

If a client had an extra $100,000 to invest, RIAs said they would put an average of $43,600 into ETFs, according to the study, which was released during Morningstar’s annual ETF conference in Chicago.

In the year ahead, 54% of RIAs said they plan to increase their investments in ETFs, and looking even further into the future, nearly half (48%) of RIAs said they see ETFs as the “dominant investment” type in the portfolios they manage.

“These numbers tell a compelling story,” said Heather Fischer, vice president of ETF Platform Management at Schwab. “RIAs clearly understand the benefits that ETFs can provide to their clients as part of an overall strategy, but they view them as just one part—albeit an important part—of an overall strategy to help their clients achieve their investing goals.”

When choosing an ETF, the study found advisors consider the following as most important:

• Low expense ratio (79%).

• Total cost (77%).

• Liquidity /trading volume (72%).

While 9 out of 10 RIAs (92%) said ETFs have had a positive impact on the way they invest for the portfolios they manage—with 44% indicating the impact has been substantial—RIAs see ETFs as complementing other products:

• 56% said mutual funds and ETFs have an equally important role in helping their clients reach investment goals.

• Only 3 in 10 said they would consider using ETFs to replace individual stocks in a portfolio.

• Only one in four said they would consider using ETFs to replace individual bonds in a portfolio.

Regarding individual investors’ use of ETFs, adoption continues to steadily rise, the survey found.

Schwab polled more than 1,000 individual investors between the ages of 25-75 with at least $25,000 in investable assets who have purchased ETFs in the past two years.

Three out of four of those investors (76%) said ETFs have had a positive impact on the way they invest their money.

On average, individual investors who use ETFs are now allocating nearly a quarter (22.5%) of their total portfolios to the products, compared to just 16% in 2012. By 2021, individual investors expect their allocations will increase to 28.7%.

In the last year, 44% of investors said they’ve increased investments in ETFs, and 10% said those increases were substantial.

In the year ahead, 43% of investors said they plan to increase their investments in ETFs, with 8% saying they expect those increases to be significant. Investors said if they had an extra $100,000 to invest, an average of $37,300 would go into ETFs, the study found.

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