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Portfolio > ETFs

ETFs and Cash Trump Mutual Funds in Advisor Usage

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Exchange-traded funds continue to gain popularity at the expense of mutual funds among financial advisors, according to a new survey by the Financial Planning Association and the Journal of Financial Planning.

Not only that, advisors even favor cash and cash equivalents over mutual funds, the findings showed.

The survey, sponsored by Longboard Asset Management, was fielded this spring and received 302 online financial advisor responses.

Eighty-eight percent of advisors in the poll said they currently used or recommended ETFs with their clients, up from 83% in 2016 and the highest usage rate since the survey’s inception in 2006.

The next most popular vehicle among 17 options was cash and cash equivalents, used or recommended by 85% of advisors, followed by non-wrap mutual funds, which 80% of advisors currently use or recommend.

This was the first time in the survey’s history that cash and equivalents surpassed mutual funds. In the 2006 poll, 53% of advisors used or recommended the category.

ETFs’ ascendancy is likely to continue. Advisors continued to see low costs and tax efficiency as ETFs’ most significant advantages over mutual funds, according to the survey.

The findings showed that half of advisors planned to increase their use or recommendation of ETFs with clients over the next 12 months. No other investment vehicle came close to this level of anticipated increased usage.

As ETFs have grown in popularity, so has misinformation about them.

In another survey finding, 47% of advisors said they were looking for new ways to diversify portfolios, and another 6% said they expected to do so in the near future.

Sixty percent of respondents said they diversified using the same suite of investment vehicles regardless of market conditions, but 27% said current market conditions made diversification harder with current asset allocation.

At the same time, more than a third doubted that a traditional 60/40 stocks and bonds portfolio could still provide the returns it had historically.

A slight majority of advisors surveyed described their outlook on the economy as “bullish” for the next six months, compared with just a quarter of advisors who said this a year ago.

The new survey found that advisors were increasingly re-evaluating the asset allocation strategy they typically recommend and implement because of changes in inflation and anticipated changes to income and investment taxes.

Alternative Investments

Seventy-three percent of advisors reported that they were allocating only between 1% and 10% to alternative investments.

The report suggested that this small allocation may explain why only 8% of advisors were considering adding alternatives into portfolios in the future. With nearly half of advisors looking for ways to diversify portfolios, alternatives appear to have room to grow, it said.

In the new survey, 15% of advisors said they used or recommended private equity and 9% direct investment in hedge funds, up from 8% and 7% in 2016.

Four percent said they would increase private equity investment over the next 12 months, and 2% said they would increase hedge fund usage. Both percentages were the same as in the 2016 poll.

Recent research shows that private equity is now considered a core holding by many types of investors.

— Check out 5 Myths About ETFs and Mutual Funds on ThinkAdvisor.


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