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DOL Fiduciary Rule to Spark More ETF Use Among Advisors: Cerulli

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Looming compliance with the Department of Labor’s fiduciary rule is pushing advisors to favor lower-cost investment products, with 45% of advisors planning to increase use of exchange-traded funds and 32% planning to boost allocations to passive investment products, according to new research by Cerulli Associates.

“These percentages solidify the uptick in ETF asset growth,” Cerulli notes in the January issue of The Cerulli Edge.

U.S. ETF assets ended 2016 at $2.5 trillion, growing 20% during the past year, Cerulli reports, which is partly attributed to “a healthy S&P 500 total return of nearly 12%,” but increasingly “more investors are starting to recognize the benefits of the vehicle and gain comfort in their use.”

Flows into ETFs reached an all-time high of $287.3 billion during 2016, Cerulli said its data confirms, “as evidenced by financial advisors’ expectations to increase their allocations to ETFs by 25% over the next two years.”

Mutual funds, however, “were clear losers in 2016,” Cerrulli said, as assets ended the year at $12.4 trillion, a 5.9% change year over year that represents only one-quarter the growth rate of ETFs.

“Flows did not do the vehicle any service,” the Boston-based research group adds, as mutual funds suffered outflows of $90.8 billion during 2016.

However, passively managed mutual funds raked in more than $226 billion while actively managed mutual funds experienced nearly the opposite, with $316 billion in outflows, Cerulli found.

“This flow data paints a more realistic picture that it’s not just about cost from a vehicle perspective, but a conscious decision from investors to switch from higher-cost actively managed strategies to lower-cost passively managed options.”

Asset managers, meanwhile, “seem more pessimistic about the future of active management, while advisor data shows a less morbid state,” Cerulli said.

Advisor-reported data currently has on average a 29% allocation to passive strategies, increasing to just more than one-third (33%) over the next two years, while data from Cerulli’s asset manager survey shows 52% of firms believe retail investors will allocate anywhere from 30% to 50% of their portfolios to passive strategies over the next two years.

— Check out Bonds, Not Stocks, Are the Future for Active ETFs on ThinkAdvisor.