Financial advisors have increasingly shifted over to ETFs as a way to diversify their investment portfolios while cutting down exposure to traditional actively managed mutual funds.
According to a new survey of financial advisors conducted by Broadridge Financial Solutions, financial advisors will be accelerating their asset allocations to ETFs in 2020.
“Financial advisors overwhelmingly plan to shift away from actively managed funds in 2020 with ETF demand predicted to increase,” according to Broadridge.
ETF usage has continuously increased, with 83% of advisors surveyed raising allocations to ETFs over the past two years.
“As asset managers continue to engage with the next generation of financial advisors, it is critical for them to consider the wind change occurring in product flows,” Matthew Schiffman, Principal at Broadridge Financial Solutions, said in a note. “Advisors planning to allocate more assets to ETFs next year are most likely to pull away assets from actively managed funds, and it’s a shift that’s likely to become more pronounced over time as lower fee ETFs continue to draw investors away from higher cost investments.”
The survey found that 64% of advisors under the age of 40 plan to make the shift toward ETFs. The results also show that younger advisors are more likely to invest in ETFs, with the likelihood of an advisor moving away from actively managed funds to ETFs rising as an advisor’s age decreases.
About 73% of survey participants revealed they expect allocation to ETFs will continue to increase in 2020, with 55% of advisors who plan to allocate more assets to ETFs also planning to shift assets away from actively managed equity mutual funds.
Meanwhile, about 48% of larger advisors with assets of over $500 million will use ETFs primarily for core positions, and 52% of RIAs exhibited a greater penchant to use ETFs for core portfolio positions.
“While assets have shifted into ETFs across the investment landscape, adoption by advisors is not equal across channels, nor is the way advisors research and make decisions for clients,” Schiffman added. “This has important implications for asset managers in terms of product development, distribution, marketing and overall advisor engagement. No one-size-fits-all approach exists, but there are clear opportunities for managers to establish mindshare around new products, including non-transparent active ETFs and thematic ETFs.”
This article originally appeared on ETFTrends.com.
This Corporate Bond ETF Thrives Even if Rates Remain
On the surface, it appears as though interest rate hedged ETFs need rates to rise to be successful. The ProShares Investment Grade—Intr Rt Hdgd (IGHG ) proves otherwise.
IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment-grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.
IGHG, which yields a tidy 3.50%, is up about 7% over the past year, indicating it has been a durable performer even as the Federal Reserve lowered borrowing costs three times in 2019.
“In a scenario where longer-term yields continue to rise and credit spreads continue to tighten, interest rate hedged corporate bonds could serve as alpha generators in a diversified fixed income portfolio,” said ProShares investment strategy analyst Daniel Busch in a recent note.
By hedging away rate risk, bond investors can focus on the underlying debt securities without fear of the negative effects of rising interest rates, maintaining their current level of income generation and potentially capitalizing on the tightening credit spreads.
Importantly, IGHG has recently shown it can outperform broader fixed income benchmarks even as yields decline.
Related: This Corporate Bond ETF Could be a Winner This Year
“For a proof point, during the fourth quarter, the FTSE Corporate Investment-Grade (Treasury Rate-Hedged) Index was up 4.67%, outperforming the Bloomberg Barclays US Aggregate Bond, Bloomberg Barclays US Treasury Index, and Bloomberg Barclays US Corporate Investment Grade Index,” said Busch.
IGHG has a high-yield counterpart, the ProShares High Yield Interest Rate Hedged ETF (HYHG ). HYHG “targets zero interest rate risk by including a built-in hedge against rising rates that uses short positions in U.S. Treasury futures,” according to ProShares.
This article originally appeared on ETFTrends.com.
