Exchange traded funds are gaining the upper hand among financial advisors who are looking for better investment alternatives to traditional, open-end mutual funds.
According to a recent Financial Planning Association survey of advisors, 81% of respondents use or recommend ETFs with their clients, whereas 78% of advisors surveyed use or recommend mutual funds. [What an All-ETF Portfolio Does for You]
“For the first time since FPA began surveying planning professionals on their use and recommendation of various investments in 2006, ETFs have surpassed mutual funds in popularity,” according to FPA.
The survey reveals the growth in popularity of ETFs among financial advisors, with just 40% of participants using or recommending ETFs in 2006, and 79% in 2014 when mutual funds still held the top spot among 82% of advisors.
Advisors are enjoying a myriad of benefits that the ETF investment vehicle had over mutual funds, with 76% of participants pointing to lower costs as the most significant advantage, followed by 55% tax efficiency, 50% trading flexibility and 22% transparency. [Investing in ETFs: Put a Dollar Figure on Your Fund Fees]
Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, also argued that the ETF industry’s growth is attributed to the expanding product line, ease of use and trend toward greater customization, reports Jeff Benjamin for InvestmentNews.
“I think we’re seeing advisers increasingly wanting to build their own portfolios or outsource the building of customized portfolios, and ETFs are a great tool for that,” Rosenbluth said in the InvestmentNews article.
Moreover, Valerie Chaillé, practice-management director at the Financial Planning Association, pointed to the multi-year rally in broad benchmarks as a contributing factor as well.
“When equities markets do well, investors tend to favor passive investments over active investments,” Chaillé said in a Wall Street Journal article.
Over the next 12 months, 51% of surveyed participants plan to raise their ETF usage or recommendations, and no other investment vehicle showed this level of popularity among advisors. In contrast, only 23% of respondents plan to raise their use of mutual funds and 22% want to add on individual stocks. [Why Investors Should Stick to Passive, Index-Based ETFs]
Alternative index-based or smart-beta ETFs are also gaining traction among financial advisors. The survey revealed that 22% of advisors have used smart-beta ETFs with clients over the past 12 months, and 14% stated that they raised their use or recommendation of smart-beat over the last 12 months.
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.