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.

The frequency of ETF usage breakdown among client portfolios include equity index ETF 43%, fixed-income index ETFs 21%, real estate ETFs 12%, low-volatility ETFs 9% and commodities ETFs 7%.

Along with the ability to provide broad market exposure, ETFs have also attracted a lot of attention for their specialized strategies. For example, the rapidly developing smart beta or customized, factor-based index ETFs could help investors generate improved risk-adjusted returns over the long haul – for example, the low-volatility strategy has been a popular way for investors to limit drawdowns during sell-offs while still participating in any upside potential. Furthermore, ETFs have helped traders easily access the commodities market, without having to deal with a commodities brokerage account.

While the quality of an index remains the top reason for RIAs in choosing an ETF, other factors that influence RIAs’ decision to buy a specific ETF includes performance 20%, total costs 15%, liquidity of ETFs 14%, expense ratio 8% and tracking error 6%.

The survey reveals that RIAs understand that there are direct and indirect fees when investing in ETFs since the investment vehicle trades like a stock on a stock exchange. Specifically, direct costs include things like expense ratios and commissions on trades, but investors can reduces these costs by targeting cheap index-based ETFs and utilizing brokerage platforms that offer commission-free trades. Indirect costs may include things like tracking error, true liquidity and bid-ask spread on trades.

The TD Ameritrade Institutional Survey reveals that RIAs expecting stronger growth in 2017. Financial advisors will also be able to learn more about opportunities and changes in the financial world at TD Ameritrade’s upcoming National LINC 2017 conference – the annual Learn. Inspire. Network. Collaborate. conference. TD Ameritrade Institutional is hosting its annual conference this week, with 3200 attendees (including 2000 RIAs). There will be some sessions where ETFs are sure to play a big role, including a panel that looks at the DOL rule and its impact on the investment process.

For more information on ETFs, visit our ETF performance reports category.