Exchange traded funds have been a huge hit in the investment community, with financial advisors increasingly turning to the index-based tool as their go-to investment option for clients.
According to the annual 2016 Trends in Investing Survey conducted by The Journal of Financial Planning and the FPA Research and Practice Institute, 83% of advisors use and/or recommend ETFs to clients as the current “preferred investment vehicle” among 18 available options, compared to just 40% of advisors back when the first survey was conducted in 2006, reports Grace Williams for Financial Advisor IQ.
ETFs have been quickly gaining traction in the investment community as a low-cost, transparent and easy-to-use investment vehicle that anyone with an online brokerage account can utilize. Surveyed advisors also pointed to lower costs, tax efficiency, trading flexibility and transparency of holdings as among the top reasons for investing in ETFs.
“ETFs can be more tax efficient because they are not generating dividends and capital gains,” Marilyn Timbers, an advisor with Voya Financial, told Financial Advisor IQ. “They can also be used to add in a more specific sector, such as biotech or gold.”[related_stories]
Due to their passive nature, management fees are at a bare-bones minimum, which has made ETFs relatively more attractive to active mutual funds on a fees basis. ETFs provide daily disclosure on their holdings. Additionally, the funds are traded like a stock and can be easily accessed through a normal brokerage account.
“You know what you get when you buy an ETF,” Brion Collins, an advisor with Bronfman E.L. Rothschild, told Financial Advisor IQ, adding that he was “one-hundred percent in ETFs.”
The survey also revealed that advisors are warming up to the new breed of smart-beta ETF strategies. Over the past 12 months, 24% of advisors said they used smart beta ETFs, compared to 22% in 2015.
However, investors should take the time to carefully consider the smart-beta options.
“Some smart beta is good,” Dan Dolan, director of wealth management for ETF issuer Select Sector SPDRs, told FA-IQ. “One thing I’d worry about there is the fees. Another downside is that it’s tweaked by people for a reason. They think it’s going to outperform, so they’re charging me more because they think it will outperform.”
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