FAs Moving Out of Cash and Into ETFs: Report
Financial advisors continued to allocate their clients’ funds to exchange-traded funds (ETFs) in 2023 while decreasing their investments in mutual funds. They also marginally reduced their allocations to alternative investments and withdrew from cash, a new report revealed.
ETFs surpassed mutual funds in terms of advisor allocations by the end of 2022. By the end of 2023, ETFs accounted for almost 30% of allocations, while mutual funds only represented less than 22%. The analysis was based on data from over 1,200 firms who utilize fintech platform provider Advyzon for portfolio reporting.
Meanwhile, alternatives accounted for a 2.3% allocation at the end of last year, which was slightly lower than the 2.7% allocation at the end of 2022. However, this was still significantly larger than the less than 1% allocation to the asset class before 2022.
According to Advyzon, the most “dramatic” adjustments occurred in cash allocations. Following an initial allocation of around 10% towards cash in 2019, advisors subsequently decreased it to 9.5% in 2021 due to concerns about inflation. This was further cut to 6.7% in 2022 and ultimately to 4.6% by the end of 2023.
“The end-of-year expectation in 2023 was that the Fed would lower rates six times in 2024,” Brian Huckstep, CIO of AIM, a turnkey asset management program under the Advyzon umbrella. “That may have prompted some investors to preemptively exit cash and very short-term bonds to seek better returns in longer-dated bonds or other investments.”
Advyzon stated that advisors who withdrew from cash may have overlooked the chance to obtain some of the immediate returns in cash equivalent accounts. The allocation to fixed income increased from 4.9% at the end of 2021 to 8.9% in 2022 and exceeded 10% by the end 2023.
By the end of 2023, direct investments in stocks accounted for 23.7% of allocations, surpassing all other types of investments except for ETFs, compared with 23.5% at the end of 2021 and 22.4% at the end of 2022.
Huckstep identified three trends to monitor for the rest of this year: The yield curve and its potential to impact bank stocks, the rising burden that corporate debt may put on equities, and how the election could impact investing overall.
