How do advisors choose among ETFs? According to the latest and fifth annual U.S. ETF Investor Survey published by Brown Brothers Harriman, in partnership with ETF.com, an ETF’s expense ratio is the number one variable advisors and institutional investors consider when choosing funds.
Of the 360 investment professionals surveyed — three-quarters were RIAs, brokers or accountants — 64% said expense ratios were the most important element when choosing among ETFs. That’s not surprising, given that 53% of respondents said their fiduciary obligation to clients was key to evaluating investment products.
It was the first time in the five-year history of the survey that expenses took the lead role in ETF selection.
“This reflects a continuation of the trend toward low-cost investing that has been underway for some time,” said Shawn McNinch, global head of ETF services at BBH, in a statement. “It makes sense when you look at both the asset flows, and the growing ETF fee war,” said Dave Nadig, CEO of ETF.com, in the same statement.
After expenses, index methodology (52%) and historical performance (48%) ranked the highest considerations for choosing ETFs overall.
When asked specifically about how they choose among actively managed funds, respondents were even more focused on expense ratios. Eighty-seven percent cited expense ratios as the most important deciding factor, followed by performance (83%) and transparency (52%).
The latest BBH/ETF.com survey also found an increasing interest in ESG strategies for ETFs. Just over half (51%) of investment professionals said such strategies were somewhat or very important when choosing ETFs, up from 37% a year ago.
Market cap-weighted and actively managed ETFs remained the most popular ETF strategies, used by 52% and 46%, respectively, of respondents. Next in line were multifactor (43%), quality (39%) and equal weighting (38%) strategies — all three examples of smart beta strategies. Sixty percent of respondents either were using these types of ETFs or had plans to add them in the future.
But one-third of respondents said they don’t use smart beta strategies and 24% had less than 5% of their assets invested in those strategies. A key reason given for avoiding smart beta: uncertainty that smart beta ETFs would produce alpha and outperform active management.
Respondents overwhelmingly (83%) reported concerns about liquidity in bond markets even though, the survey notes, bond ETFs have responded well to credit crunches.
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