Advisors Are Hesitant to Jump on ETF Bandwagon

ETFs may have seen a swift rise in the investing world, but hidebound advisors are loath to add passive ETF products to their client portfolios.

According to new research from Cerulli Associates, ETFs are not poised to steal market share in the advisor channel, writes Hannah Glover for Ignites. Cerulli found that around half of advisors surveyed used ETFs; however, ETFs were only about 5% of their client portfolios.

A survey titled “Exchange Traded Funds: Threat or Threatened?” with more than 400 advisors reveals that 45% of participants prefer using actively managed funds in client portfolios instead of passive ETF products and 21.7% are reluctant to reallocate existing client portfolios.

Since 2005, overall assets in ETFs jumped from $300.8 billion to $693.4 billion as of September, and ETF products increased to around 700 products from 204. But observers argue that this is only a small figure compared to the $10.8 trillion in total assets found in mutual funds.

Still, Lisa Cohen, CEO of Momentum Partners, believes that “really good advisors should be able to prove value by using both [ETF and traditional fund products].” ETFs are not simply alternatives to mutual funds, rather they enhance investment strategies by providing access to hard-to-reach areas like commodities, international and other niche markets.

The results of this study don’t jibe with past ones, which have revealed that advisors do plan to use ETFs more in coming years. A study this year by Cogent Research with 1,500 respondents showed that many advisors expect to reduce their clients’ holdings of mutual funds to 27% by 2011, down from 30% today and 35% in 2007. By 2011, they expect ETFs will make up around 14% of their portfolios, or 8% more than now.

Max Chen contributed to this article.

Comments

[Analyste de...:]

It makes sense that - after a huge Bear Market & collapse - advisors affirmatively answered they MIGHT use ETFs more in coming years. They should 'look' to make changes; that doesn't mean they will, either.

I'm not surprised 55% use ETFs now; but I am shocked (of that 55%) that's only 5% of their portfolios. What %age AUM (in the 55%) is that, btw? Bet their clients lost big-time in the 2007-09 Great Bear, and will suffer again if it re-commences in 2010 or 2011 !

It appears advisors are moving verrrry slowly into these index products. Clients will regret that! Presume ETF exposure is overwhelmingly in commodities, currencies, and niche sectors (like KOL, PKN, WIP, etc.) where no mutual fund is available, from the limited info presented here. 5% ? Wow, that's missing the boat.

The average 2020 lifecycle fund investor is still DOWN -24% since 10/9/07. Going forward, s/he needs a +32% return just to break even. Assuming bonds hold steady, that's an estimated +44% gain in equities from here. Can that happen for mutual fund owners, without a Stimulus 2?

Don't count on it.

Nov 15 05:37 PM

[George Spri...:]

The problem with most ETFs is lack of liquidity. Let's say you are an advisor who wants to invest $2 million of your clients money, and you have a choice between buying a no-load mutual fund or a similar ETF. Here are some reasons why the mutual fund is the better choice for most advisors.
1) The ETF has a bid-asked spread, the mutual fund does not.
2) The ETF has commissions, the no load mutual fund does not.
3) There is no market impact when you buy the mutual fund, but your market orders to buy $2 million of the ETF will move the price against you.
4) With the mutual fund, all of your customers get the same execution price. This may not be possible with the ETF.
5) Some ETFs that are "too" transparent are subject to front running. This is normally not possible with no-load mutual funds.

Nov 15 05:57 PM

[jmezerhane:]

Hi George I do not agree with you in point #1, #2 and #3,
Some ETFs may have lack of liquidity and others not, it depends on the market where both invest. Assuming an ETF and a mutual fund trade in a market thinly traded, the mutual fund investor will suffer from the bid-ask spread indirectly because the Fund manager has to invest $2.000.000 in market with low breath where the shares has a large bid-ask spread. Regarding the point #3 the mutual fund investor will suffer from the market impact when ask for the refund of the $2.000.000
Regarding point #2 Mutual funds has larger commissions than ETFs, both have custody commission, both have manager commision (bigger for the fund), an mutual fund investor pay more taxes than a ETF investor.


On Nov 15 05:57 PM George Spritzer wrote:

> The problem with most ETFs is lack of liquidity. Let's say you are
> an advisor who wants to invest $2 million of your clients money,
> and you have a choice between buying a no-load mutual fund or a similar
> ETF. Here are some reasons why the mutual fund is the better choice
> for most advisors.
> 1) The ETF has a bid-asked spread, the mutual fund does not.
> 2) The ETF has commissions, the no load mutual fund does not.
> 3) There is no market impact when you buy the mutual fund, but your
> market orders to buy $2 million of the ETF will move the price against
> you.
> 4) With the mutual fund, all of your customers get the same execution
> price. This may not be possible with the ETF.
> 5) Some ETFs that are "too" transparent are subject to front running.
> This is normally not possible with no-load mutual funds.

Nov 16 09:54 AM