“Large distributions on capital gains can come from mutual funds,” Sullivan told Financial Advisors IQ. If clients “are above a certain income level, they may have to pay taxes on those gains.” Those taxes decrease client’s “overall return” and can push their advisor towards ETF investments.
Other observers also underscore the stock market fluctuations as another motivating factor behind the increased ETF usage.
During volatile conditions “you see advisors looking towards ETFs,” Swolfs said. Advisors aruge that ETFs are easier to use than “committing and tying assets to an active manager. If the market goes down, portfolios using ETFs lose value representative to how much the market decreases,” but “active managers often ride the market down as much as ETFs, if not more.”
“The idea that active management will save you in a down market is not necessarily true,” Swolfs added.
For more information on the ETF industry, visit our ETF performance reports category.