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At this point, it’s safe to say many advisors are aware of the proliferation of exchange traded funds. After all, they’re primary drivers of steadily increasing ETF adoption.
The recently released 2024 ETF Impact Survey from State Street Global Advisors (SSGA) delves into a variety of topics pertaining to ETF adoption among advisors and institutional investors as well as self-directed market participants. One of the highlights the survey is that 70% of the polled advisors told SSGA that they’re “always” or frequently recommending ETFs to clients.
Of course, inquiring minds want to know and what they want to know is why advisors have so readily flocked to ETFs over the years. Far advisors that are ETF reluctant, the following could prove instructive regarding why they’re competitors are so enthusiastic about ETFs.
As noted by SSGA and seen in real time in real world practices, the four pillars of advisor ETF adoption are diversification benefits, cost efficiencies, trading flexibility and liquidity management. Let’s examine each below.
Costs, Diversification Are Attractive
Yes, there are myriad examples of ETFs that have concentrated rosters. Even a basic S&P 500-tracking ETF or index fund will allocate about 35% of its weigh to just its top 10 holdings. However, there are also plenty of equity and fixed income funds that remain diverse and that’s one reason why advisors love the asset class.
For example, a fund tracking the Bloomberg U.S. Aggregate Index (“the Agg”) could hold 11,750 bonds while the Vanguard Total World Stock ETF (VT) holds 9,823 stocks. Those are just two examples, but they underscore the point that it’s easy to find diversity with ETFs. It’s also easy to find low-cost ETFs because it was in large part low fees that buoyed the ETF revolution.
“Compared to mutual funds, ETFs typically have lower expense ratios due to their passive management style. This means investors can enjoy broader market exposure without the high fees associated with actively managed funds,” according to SSGA. “The cost savings on management fees and reduced transaction costs make ETFs an attractive choice for cost-conscious investors. Both institutional investors and financial advisors rank cost efficiency as the primary driver for using and recommending ETFs (57% and 44%, respectively).”
Liquidity, Trading Flexibility Important, Too
Advisors that have been in the business since before the dawn of ETFs likely grew up with mutual funds and index funds and know that those products trade just once a day: at the close of markets at the funds’ net asset value. ETFs’ trading hours are commensurate with stocks and bonds, providing significantly more agility and control.
Trading flexibility speaks to liquidity management, which is another of the big reasons why so many professional investors, including advisors, are keen on ETFs.
“ETFs are known for their high liquidity, or their ability to be easily bought and sold in large quantities without significantly affecting their market price,” concludes SSGA. “This liquidity is particularly appealing to institutional investors who need to manage large volumes of assets efficiently. The ability to get in and out of markets quickly ensures that ETFs remain a flexible and responsive tool in portfolio management.”