Advisors Growing “More Comfortable” with ETF Allocations
Financial advisors predict that by 2026, exchange-traded funds (ETFs) will comprise a larger share of their clients’ assets than mutual funds will for the first time ever.
July was the second-best month ever recorded for ETF assets. They expanded by $329 billion, or 3.6%, with net inflows accounting for $119 billion of that increase. Through July, ETF assets have climbed by $1.4 trillion, or 16.8%, with net flows totaling $526 billion, reflecting a 6.5% organic growth rate, according to the latest report from research and consulting firm Cerulli Associates. The lone asset classes that experienced net outflows were international equity and allocation ETFs.
Meanwhile, mutual funds had $39.5 billion of total net outflows in July, representing an organic growth rate of -0.2%, although they still grew by $332 billion in assets, or 1.7%. Mutual funds have seen $175 billion in net outflows so far this year, though assets still increased by $1.6 trillion, according to the report.
Financial advisors anticipate that by 2026, 25.4% of their clients’ assets will be invested in ETFs, a 3.8 percentage point increase from current levels, while just 24% will be in mutual funds, including liquid alternatives, down 4.7% from today, as advisors become “more comfortable with the product and its use across a wider range of asset classes,” according to the “The Cerulli Edge – U.S. Monthly Product Trends” report.
More than half of the independent registered investment adviser (RIA) channel’s assets are already allocated to passive products, and nearly all advisors (90%) use ETFs in some form, according to Cerulli.
This shouldn’t come as a shock given that 82% of financial advisors feel passive investing can help lower overall portfolio fees. Most advisors also concur that, when acting in a fiduciary capacity, passive investments should be considered (66%) and that, when employed strategically, passive investments can increase returns through asset allocation (63%).
Accessing ETF products is becoming more convenient for advisors as more asset managers become involved in the appeal of ETFs. BlackRock joined other asset managers that have made this transition by announcing its intention to undertake its first mutual-fund-to-ETF conversion earlier this year.
Don’t Dismiss Active Managers
While passive investments are gaining in popularity, 83% of advisors agree or strongly agree that active managers are appropriate for specific asset classes. Additionally, almost three-quarters (72%) of advisors agree or strongly agree that active managers can mitigate downside risk by engaging in tactical trading in volatile markets, Cerulli noted.
However, nearly two-thirds of advisors (61%) agree or strongly agree that it is difficult to consistently pinpoint which active managers will outperform their benchmarks. This figure rises to 80% among independent RIA channel advisers, the group most likely to use passive products.
Active ETFs are growing more prevalent in advisor portfolios. Hybrid RIA advisors now allocate the most assets to actively managed ETFs. Cerulli said that the range of active ETFs is also growing quickly, highlighting the introduction of new securities by BlackRock, Federated Hermes, and Schwab Asset Management. Allspring has submitted documentation for six active ETFs that it intends to incorporate into its offerings next year.