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As was recently highlighted in this space, the SPDR® S&P 500® ETF Trust (NYSEARCA:SPY) – the first exchange traded fund to list in the U.S. – turned 30 years old last month.
Whether the investment community deems it an anniversary or a birthday, SPY turning 30 is significant because this is undoubtedly the product that kick-started an investing revolution in which registered investment advisors are active, important participants.
Yes, there was certainly a time when advisors were compelled to direct client assets to higher-cost actively managed products with propensities for not beating the market. Fortunately for advisors and clients, ETFs altered that landscape.
In 2006, when SPY was merely an adolescent, just 40% of advisors were embracing ETFs. It took barely more than a decade for that percentage to double. However, other data points indicate there’s ample room for more ETF penetration among advisors.
Expect More ETF Growth
In the 2023 ETF Impact Survey: Advisor Edition, courtesy of State Street Global Advisors (SSGA), various data points suggest advisors are barely past the scratching surface with ETFs and that’s even taking proverbial grain of salt accounting for SSGA’s status as one of the “big three” among ETF issuers.
“Overall, perception of the benefits ETFs have brought to investors has been overwhelmingly positive. The survey found that 59% of US investors with an existing ETF holding report that ETFs have improved the overall performance of their portfolio. Furthermore, more than half (53%) of US investors believe ETFs have made them a better investor,” according to the survey.
Think about that latter point for a moment. More than half of investors believe ETFs are helping them reach better outcomes. One way of looking at that is that an advisor that pushes clients into actively managed mutual funds runs the risk of losing business.
Another plausible take-away from that point is there’s a reason why several fund issuers that dominate the active landscape – American Funds and Dimensional Fund Advisors (DFA) just to name a pair – are among the fastest-growing ETF issuers. Additionally and importantly, the advisor usage case for ETFs is expanding.
“ETF use cases in the advisory market have expanded significantly in the three decades since SPY’s launch, and continue to evolve beyond just asset allocation and diversification planning. A number of wealth management firms use ETFs to package their investment beliefs into outcome-oriented products for their clients. ETFs have also been used to create model portfolios that give advisors the ability to outsource the investment component so that they can focus more attention on client outcomes,” notes SSGA.
Advisors Have Good Reasons to Embrace ETFs
As Brie Williams, head of Practice Management at State Street Global Advisors, points out, there are compelling reasons for advisors to consider ETFs.
“Advisor adoption of ETFs has provided investors with cost-effective access to institutional-grade solutions,” said Williams. “The flexibility to buy and sell shares quickly, easily, and cost-efficiently is important to advisors and their clients in all markets.”
Those are among the reasons why nearly two-thirds of advisors surveyed used ETFs last year and why 41% plan on boosting use of the products in the year ahead.
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