The ETF industry has rapidly evolved over the past eight years. There were roughly 750 ETFs in 2008; currently, there are more than 1,900 ETFs competing for more than $2 trillion in assets under management in the U.S.
ETF usage has grown in popularity among investors in recent years. Some of the main reasons for the success and popularity of ETFs are their low costs, transparency, tax-efficiency and versatility. These attributes provide an opportunity for financial advisors and individual investors to access investment options on par with the quality often only available to institutional investors. In addition, institutional investors can utilize ETFs because ETFs provide greater flexibility in their portfolio construction.
We have gained valuable insight on various ETF themes, trends and investment strategies during our time at the 2017 Inside ETFs Conference.
Today, we dive into a few important insights for advisors. Look out for Insights from the Inside ETFs Conference: Investor Edition where we delve into our important takeaways for investors.
1. Increased Need for ETF Due Diligence
Given ETF proliferation in recent years coupled with the rise of smart beta strategies, ETF due diligence and its importance cannot be understated. With more than 1,900 ETFs in the U.S., selecting one from such a vast diversity can be time-consuming and overwhelming.
Advisors are well aware of ETF benefits. Given the rising number of ETFs, especially in the smart beta space, advisors are increasingly understanding the importance of ETF risks, index composition and weighting methodologies.
Ultimately, this means that due diligence becomes increasingly important as advisors must understand the nuances of ETF investment strategy, including its holdings and weightings, by reading the fund prospectus. Read The Hidden Risks and Costs of ETFs for more information.
Vanguard’s and Blackrock’s due diligence approaches, which are widely accessible, recommend scrutinizing ETFs in the following five dimensions:
- Costs
- Liquidity
- Exposure
- ETF provider
- ETF structure
A full list of Vanguard and Blackrock ETFs can be found on ETFdb.com’s Issuers page.
2. Increased Adoption and Usage of ETFs Among Advisors
ETF usage and adoption among all types of investors is rising, and will likely continue to rise in the future. 2016 finished with a bang as investors poured more than $280 billion into ETFs in the calendar year. According to the 2016 FPA Trends in Investing Survey, conducted by the Journal of Financial Planning, 83% of advisors say they use or recommend ETFs for their clients’ in their client portfolios. ETFs have become the most popular investment product for advisors, surpassing mutual funds in 2016. Advisors continue to adopt ETF usage for both aggressive and conservative clients, because they see ETFs as a fit for both growth and income portfolios.
Check out ETFdb.com’s Financial Advisor Center. Find tips, tricks and advice to help you navigate the uncertain financial markets, and better position your financial advisory practice.
3. Robos Are Rising
With the rise of robo-advisors, the traditional financial advisory model is likely going to change. According to Bloomberg, the use of robo-advisors rose by over 200% in 2015. Even though the amount of money invested using robo-advisors is relatively small at $50 billion (compared to the total assets of the wealth management industry), the growth in adoption cannot be ignored.
Robo-advisors utilize a questionnaire to assess a client’s risks and return expectations, after which it assigns the client a set of ETFs that track broad market indexes.
Robo-advisors and other algorithm-based software are offered by leading investment brokerages and online platforms specializing in retail trading.
Recently millennials and smaller retail investors have been the primary focus of robo-advisors. However, as both the market and technology mature, we are beginning to see a demographic shift. As more baby boomers head into retirement, this generation is increasingly becoming a key segment of customers for robo-advisors. This is primarily for two reasons. Firstly, baby boomers are increasingly becoming comfortable using mobile devices, and are strongly desiring digital investment services. Secondly, baby boomers are the biggest generational client base for investments services.
Examples of robo-advisory firms include Betterment, Wealthfront and Wealthsimple.
Asset management firms such as Charles Schwab, Vanguard and WisdomTree have rushed to launch their own robo-advisor programs in recent years. This is likely a sign that algorithm-based investing will become more specialized over time. For instance, Charles Schwab released its robo-advisory platform, Schwab Intelligent Portfolios, in 2014, and Vanguard released its robo-advisory platform, Personal Advisor Services, in 2015. WisdomTree released its AdvisorEngine robo platform in November 2016.
To learn more about robo-advisors, read ETF Friendly Robo-Advisors. To find out how robo-advisors may impact the future of investing, read How Will Robo-Advisors Impact the Future of Investing.
4. Building Portfolios Using ETFs
ETF-managed portfolios represent one of the fastest-growing segments of the asset management industry. ETF-managed portfolios are investment portfolios/strategies that have more than 50% of portfolio assets invested in ETFs.
Proponents of ETF-managed portfolios suggest that they are the “best of both worlds”, in that they combine active and passive strategies. Relying on an all-ETF portfolio offers a higher potential for returns because they provide lower expenses and costs compared to other types of investments. This can lead to a substantial increase in wealth, via compounding, over the long term.
Opponents, however, argue that ETF-managed portfolios negate the benefits of ETFs, particularly when it comes to the advantages of index-based investing. They argue that ETF managed portfolios generally try to time the market, and most of the people who get into ETFs initially do so because they do not believe in timing the market. Furthermore, investors adhering to the same strategies may end up with completely different returns due to rebalancing and other portfolio changes. Finally, frequent turnover and trading of securities within some strategies may increase costs for investors.
Regardless of which camp you are in, ETF-managed portfolios are here to stay. According to Blackrock, ETF-managed portfolios are expected to double to more than $700 billion by 2020. Blackrock attributes this to two reasons: growing retail and institutional investor demand and increased adoption and usage of ETFs.
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