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End of Debate, Research Shows ETF Usage Growing

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It’s time to end the debate about whether adoption of exchange-traded funds is on the rise. According to new reports from kasina and Cerulli Associates, advisors’ use of ETFs is growing.

In a March 2011 survey from kasina and Horsesmouth’s FA Vision, a service providing data about advisors, about three-fourths of advisors said they use ETFs in their client portfolios and more than half (56%) said their usage of ETFs increased in the past year. The results are based on 768 responses from advisors across channels and Hari Krishnaswami, FA Vision Product Manager, shared them with us.

In addition, according to the results from financial consulting firm kasina, advisors are using ETFs in a number of ways — not just to solve one type of problem. According to the results, about 60% of advisors who use ETFs “believe they are a fit for both growth and income portfolios” and three-fourths of advisors indicated they would use the products for both aggressive and conservative clients.

In addition, kasina found ETF adoption is particularly strong in certain advisor channels, with nearly 95% of advisors with traditional wirehouses having adopted ETFs versus only about 37% of advisors with insurance companies.

Meanwhile, in its March 2011 issue of “The Cerulli Edge — U.S. Asset Management Edition,” research firm Cerulli Associates, which specializes in global asset management and distribution trends, noted that close to half of financial advisors are now using ETFs and adoption is particularly strong among registered investment advisors and wirehouse advisors, with 62% of RIAs and 53% of wirehouse advisors using ETFs.

In addition, according to the Cerulli report, about half of advisors said in 2010 that they expect to increase the percentage of their allocation in ETFs this year, putting ETFs at the top of advisors’ list of products they expected to increase allocations for. A closer look at this data reveals that 32.7% of advisors said they expected to increase their allocation of ETFs by up to 10% and 17% said they planned to increase their ETF use by more than 10%.

Even more, the Cerulli report states that 2010 marked the “first distinguishable bump” in recent years in how much of their clients’ portfolios advisors are allocating to ETFs and “for the most part, advisors are optimistic about ETFs and what these vehicles provide to their clients’ portfolio.” The Cerulli data represents the views of thousands of advisors across channels.

To be sure, the reports note that there is still plenty of room for ETF adoption – and the percentage of client assets advisors commit to ETFs — to continue to grow.

In its report, Cerulli declares that ETFs are at an “inflection point” regarding whether they will continue their current growth track or will “experience massive growth.” As the report notes, “the next few years may be pivotal in terms of determining whether it is business as usual for ETFs (i.e., a moderate growth environment) or whether these products experience massive growth, posing a grave threat to mutual funds.”