How Popular Are Exchange-Traded Funds, Really?

Yeah, but what does it mean for 401(k)s?
Yeah, but what does it mean for 401(k)s?

The low-cost message is getting through (with a helping hand from the Department of labor), and exchange-traded funds top mutual funds for the second year in a row as the most popular investing vehicle among advisors.

A recent survey conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, titled the 2016 Trends in Investing Survey, finds 83 percent of financial advisors surveyed are currently using or recommending ETFs with their clients—the most popular investment vehicle among 18 options.

The survey has shown continued growth in the popularity of ETFs since 2006, when just 40 percent of survey participants indicated they used or recommended ETFs. This percentage grew to 44 percent in 2008, to 79 percent in 2014, to 81 percent in 2015, and now 83 percent in 2016.

The 2016 survey also indicated that 46 percent of advisors plan to increase their use or recommendation of ETFs with clients over the next 12 months.

No other investment vehicle showed this level of anticipated increased usage. For example, 23 percent plan to increase their use of individual stocks and 21 percent of respondents plan to increase their use of mutual fund wrap programs.

Among the reasons why financial advisors are showing more favoritism toward ETFs, lower costs (75 percent), tax efficiency (56 percent), trading flexibility (51 percent), and transparency of holdings (22 percent) were the primary reasons.

“The vast majority of ETFs are based on indexes, including those that focus on ‘smart beta,’ and I think the growth in popularity is to a significant degree reflective of the ongoing shift among financial planners toward more ‘passive’ approaches to investing client assets,” Dr. Dave Yeske, DBA, CFP, practitioner editor of the Journal of Financial Planning, said in a statement. “Even planners who still use ‘active’ investment strategies will often start with a core portfolio built around index funds, increasingly in the form of ETFs.”

Although the concept of “smart beta” continues to get media attention, and fund providers continue to release new ETFs products in this category, survey results indicate that only 24 percent of advisors have used smart beta ETFs with clients in the last 12 months. This is a slight increase from the 22 percent reported in the 2015 survey.

Other key survey findings:

  • Advisors’ long-term economic outlook is much more positive than their short-term outlook. The majority (64 percent) of advisors are “bullish” for the next five years, compared to just 26 percent “bullish” over the next six months.
  • Although the percentage of advisors favoring active management remained unchanged from 2015 (15 percent) and was slightly lower than that reported in 2014 (18 percent), a larger majority of advisors (64 percent) now indicate a preference for a blend of active and passive management compared to what was reported in 2014 (57 percent).
  • The 2016 survey shows that advisors are increasingly re-evaluating the asset allocation strategy they typically recommend/implement due to changes in the administrative aspects of investments, such as cost and lead manager (30 percent, compared to 22 percent in 2015). Meanwhile, advisors seem less concerned with inflation and changes to investment tax legislation today than in 2015.
John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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