Most professionals have noticed the move to ETFs happening, but a recent article at AdvisorOne makes the magnitude of the shift more clear:
Since the beginning of 2012, investors have pulled almost $15 billion from U.S. stock funds, while boosting money put into ETFs by $16 billion, according to industry studies.
In the latest AdvisorBenchmarking report, for example, 54% of advisors say they are likely to increase their use of the ETFs in the near future, with 43% saying they expect their use of ETFs over the next three years to remain the same.
What is the strategic role of ETFs in portfolios? According to the survey, many strategies lie behind ETF implementation. While “core” and “sector” exposures were most common, several other approaches were all within a few points of each other, including: alternatives exposure, directional market positions, factor or asset class exposures and country/region exposure. Clearly, ETFs are providing advisors and investors with attractive options for expressing their views, and that is translating into strong, consistent growth for these vehicles.
AdvisorBenchmarking provided a nice graphic on the strategic uses of ETFs. It’s clear that ETFs are multipurpose vehicles because advisors are using them to meet a lot of different objectives!
Source: AdvisorBenchmarking/AdvisorOne (click on image to enlarge)
According to their survey, only 8% of ETF use is coming from directional market positions—far less than imagined by people who criticize ETF investors as reckless market timers. For the most part, advisors are using ETFs to get exposures that were unavailable before, whether it is to a specific sector, country, or asset class.
Most of the ETFs now available offer passive exposures to various indexes. More interesting to me are the small number of semi-active ETFs that are designed to provide factor exposure in an attempt to generate alpha. Research suggests that combining factor exposures might be a superior way to capture market returns.
The Technical Leaders indexes are constructed to provide exposure to the momentum (relative strength) factor and there are a couple of low-volatility ETFs around as well. There are a few ETFs explicitly designed for value exposure, although I don’t think this area has been well-exploited yet. (I’m sorry to see Russell close down their suite of ETFs, which I thought had a lot of promise.)
With more and more options available to advisors, I would not be surprised to see ETF use continue to surge.
