A large number of registered investment advisors, or RIAs, have adopted exchange traded funds in their clients’ portfolios, citing numerous benefits that the investment vehicle have over traditional open-end mutual funds.
According to TD Ameritrade‘s latest institutional RIA sentiment survey, the majority of financial advisors showed they use ETFs in clients’ portfolios due to their low cost, market liquidity and convenience in achieving asset-allocation goals. Specifically, RIAs use equity index and sector-related ETFs the most, citing quality of the underlying index as the main reason to choose an ETF, followed by performance and total cost.
The survey revealed that respondents specified asset allocation as the top reason advisors used ETFs at 77%, followed by lower costs of ETFs 72%, liquidity 66%, transaction costs 60% and access to new asset classes 58%.
ETFs are largely a passive, index-based investment vehicle that allows anyone to easily and cheaply access various broad and specialized market segments. Due to their passive nature, the ETFs come with low investment fees – there are 1,981 U.S.-listed ETFs on the market with an average 0.57% expense ratio and the cheapest ones come in at a low 0.03% expense ratio.
RIAs indicated that they primarily utilize ETFs for broad equity index exposure at 82%, which may help fill out a core investment position, along with sector ETF picks at 66% for clients, which could allow advisors to take on tactical opportunities.