Demand for exchange-traded funds is expected to continue growing in 2020 and beyond as financial advisors increasingly shift their allocations away from actively managed mutual funds, according to a new Broadridge Financial Solutions survey.
Seventy-three percent of the 513 advisors polled online for the ETF Outlook 2020 study said they expected their allocations will continue to shift in favor of ETFs this year after 83% of them increased their asset allocations to ETFs over the past two years. Advisors who were polled all had at least $10 million in assets under management and at least 10% of their AUM allocated to ETFs, Broadridge noted.
Broadridge predicted in the report that, in the next few years, “ETFs will likely surpass actively managed mutual funds in advisor asset allocation.” After all, actively managed mutual funds only had a slight lead over ETFs now among those surveyed: 29% vs. 27%, according to the firm.
“Since the early 1990s, ETFs have drastically transformed the asset management industry,” Broadridge wrote in the report. “It’s no secret that investors continue to gravitate to ETFs,” it said, adding: “Low cost combined with tax efficiency is a formidable one-two punch. Plus, the popularity of passive index investing makes ETFs a go-to-option for many retail investors.”
Among advisors who said they were planning to allocate more assets to ETFs, 55% indicated they planned to mainly shift assets away from actively managed equity mutual funds, Broadridge said. In comparison, only 15% said they planned to primarily shift assets away from individual stocks, followed by passive equity index mutual funds (14%), cash and equivalents (9%) and bonds or fixed income mutual funds (5%).
The likelihood of an advisor shifting from actively managed funds to ETFs increases among younger advisors, with 64% of advisors surveyed under the age of 40 saying they planned to make this shift, vs. 55% for those 40 to 54 and 48% for those 55 and older, Broadridge said.
“A younger generation of advisors tend to prefer low-cost ETFs to actively managed mutual funds,” the company wrote. The findings indicated “potential long-term shifts in product preference as older advisors retire and transition their business,” it said.
Thirty-six percent of the advisors surveyed indicated they used ETFs mostly for core positions. However, usage varied by AUM and channel, according to Broadridge.
Broken down by advisor channel, RIAs are the most likely to use ETFs for core portfolio positions (52%), followed by wirehouse advisors (36%) and independent broker-dealers/regional advisors (31%). Meanwhile, 48% of larger advisors — those with AUM of $500 million or more — use ETFs mainly for core positions, Broadridge pointed out.
Heavy ETF users — defined as having more than 40% of AUM in ETFs — are more likely to be found within the RIA channel (44%) compared to IBD/regional (23%) and wirehouse (14%) channels, according to the survey.
Wholesalers and websites are the primary resources advisors use from ETF providers, although usage differs by channel, Broadridge noted.
When researching new products, RIAs were found to be more receptive to digital marketing channels including webinars, while wirehouse and IBD/regional advisors prefer to leverage wholesalers for product information and selection, the firm said.
Across channels, only 16% of advisors rated existing ETF information and analytical tools from all sources as “excellent,” Broadridge said.
“As asset managers continue to engage with the next generation of financial advisors, it is critical for them to consider the wind change occurring in product flows,” according to Matthew Schiffman, principal at Broadridge. “Advisors planning to allocate more assets to ETFs next year are most likely to pull away assets from actively managed funds, and it’s a shift that’s likely to become more pronounced over time as lower fee ETFs continue to draw investors away from higher cost investments,” he said in a statement.
Although assets have shifted into ETFs “across the investment landscape, adoption by advisors is not equal across channels, nor is the way advisors research and make decisions for clients,” Schiffman noted, adding: “This has important implications for asset managers in terms of product development, distribution, marketing and overall advisor engagement. No one-size-fits-all approach exists, but there are clear opportunities for managers to establish mindshare around new products, including nontransparent active ETFs and thematic ETFs.”
The survey was conducted Nov. 8 to Dec. 5 for Broadridge by 8 Acre Perspective Corp. A total of 513 financial advisors across RIA, wirehouse, regional and IBD channels completed the survey, Broadridge said.