Exchange traded funds are among the go-to investment picks among financial advisors seeking to build a cheap, tax-efficient and diversified portfolio for clients.
According to a recent survey conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, a survey of financial advisors revealed that 83% of respondents indicated that they are currently using ETFs or are recommending them to clients, reports Michelle Zhou for Financial Planning.
Related: ETF Investors Are Buying the Dips
Survey respondents also revealed they plan to increase their ETF usage next year. In contrast, mutual funds, the traditional investment portfolio staple, has only found favor among a relative minority of advisors.
“Index funds including ETFs have really become dominant in the industry,” Dave Yeske, practitioner editor of the Journal of Financial Planning, told Financial Planning.
Yeske argued that the survey only confirms the idea that advisors are embracing the benefits of ETF investments, such as evidence that passive investments provide more consistent and reliable returns over the long run.
“When I first started working in this business, ETFs were just getting popular,” George Gagliardi, a certified financial planner with Coromandel Wealth Management, told CNBC. “They made sense to me in terms of being the best building blocks available. They were more tax efficient, transparent and less expensive than most open-ended index funds. They also had a variety of options that has continued to increase.”
[related_stories]Supporting the surge in interest for ETF options, “lower costs” were cited as the principal advantage of ETFs over mutual funds, according to 75% of the advisors surveyed. Moreover, tax efficiency, trading flexibility and transparency of holdings were among other notable attributes.
“I use ETFs 98 percent of the time in my clients’ portfolio. The biggest benefit is the flexibility of trading. My clients don’t feel like sitting ducks. If the market drops, they don’t want to have to wait until 4 o’clock to sell a mutual fund. ETFs avoid that problem,” Rose Swanger, a CFP with Advise Finance, told CNBC, pointing out that ETFs also can be traded like stocks and offer the ability to use stop loss and limit orders, which mutual funds don’t offer.
Related: Institutional Smart-Beta ETF Adoption is Quickly Rising
Many financial advisors stick to broad index-based ETFs for their core investment positions, along with some smaller or satellite positions in various sector or targeted ETFs to augment their core holdings.
Additionally, while still a nascent segment of the ETF industry, smart beta strategies continue to attract investors. Survey results revealed that only 24% of advisors have used smart beta ETFs with clients in the past 12 months, but that figure is 2% higher year-over-year.
For more information on ETFs, visit our ETF performance reports category.