ETF Uptake

Many advisers (43%) distinguish 401(k) plans as the most significant growth area for exchange-traded funds (ETFs), according to The Impact of Exchange Traded Products on the Financial Advisory Industry, a joint study of State Street Global Adviser and Knowledge@Wharton, the online business journal of The Wharton School of the University of Pennsylvania.

The result was unsurprising given the significant pool of assets available in 401(k) plans ($3 trillion), says Anthony Rochte, Senior Managing Director of State Street Global Advisors. “It’s a little bit of the “if-not-when” scenario,” he says. “There’s clearly going to be more adoption of ETF funds in 401(k) plans because it is such a significant market.”

The largest obstacle remains “in the piping and plumbing of the 401(k)” or in facilitating the different settlement process of ETFs compared with mutual funds, Rochte says. “I think there’s still some innovation that will need to occur before it becomes commonplace.”

ETFs have amassed nearly $700 billion in assets, with extreme growth in the last few years, the study says. The low-cost structure, tax-efficiency, and transparency of the vehicles have propelled their popularity. More than two-thirds of the array of advisers surveyed concur with the statement that ETFs are the most innovative investment vehicle of the last two decades. Sixty percent report that ETFs have fundamentally changed the way they construct a portfolio.

While a majority of financial advisers (76%) identified themselves as light to moderate users, indicating that less than 50% of their portfolios utilize ETFs, only 4% report not using the instruments altogether. Forty-one percent of the total advisers have $5 million or more in assets invested in ETFs.

The strongest appeal of ETFs across the types of advisers was liquidity and low cost. Also scoring high were tax efficiency, intraday trading, and investment style purity. Yet, the study displays some differentiation across the different channels of advisers. For instance, the ability to short-sell ETFs is an attractive attribute to asset managers on the list, notes Rochte. The study also illustrates the adoption of ETFs with broker/dealers. In fact, 98% of broker/dealers report using ETFs to some extent, and Rochte expects that to continue. “I think in the next five to 10 years, the traditional brokerage firms probably will grow their share pretty significantly,” he says. Also, as more advisers move toward fee-based business, ETFs are an attractive, low-cost option.

When asked what the main disadvantages are of ETF investing, the choices garnering the most responses were: the “unknown/untested indexes and/or portfolio methodologies” (48%) and an “overwhelming number of choices” (21%).

The survey was conducted by 840 investment professionals across all segments and experience in March.