For the second year in a row, ETFs topped the popularity list among financial planners, with 83% of advisers indicating that they currently use ETFs or are recommending them to clients in a recent survey.

Not only that, many of the respondents say they plan to increase their use of ETFs next year. This contrasts sharply with mutual funds, the standby product of personal finance for decades, which found favor with a relative minority of advisers.

The survey, which included 17 other investment options, was conducted by the Journal of Financial Planning and the FPA Research and Practice Institute.

"Index funds including ETFs have really become dominant in the industry,” says Dave Yeske, practitioner editor of the Journal of Financial Planning.


The responses confirm that advisers are now embracing the academic evidence: passive investing leads to more consistent and reliable results, says Dave Yeske, practitioner editor of the Journal of Financial Planning.

"Index funds including ETFs have really become dominant in the industry,” says Yeske.

Although ETFs took the top spot, mutual funds came a close second, with 80% of the 283 advisers who responded to the survey using or recommending them. Cash and cash equivalents followed at 74%.

Last year, ETFs topped the list at 80%, and for the first time surpassed their perennial rivals since the first survey was conducted a decade ago in 2006. Back then only 40% of advisers said they used or recommended ETFs, compared to 85% for mutual funds.

Not only are advisers actively employing ETFs as a core strategy in portfolio building, they also expect to expand on that approach, according to the Journal’s report. Close to half of the respondents, most of whom were independents, said they plan to increase their use and recommendation of ETFs in the next year. Other investment vehicles showed far less expected usage; individual stocks came in second at 23%.

Mutual funds did even worse. Only about a fifth of advisers declared that they will use or recommend the product more.

“Lower costs” were cited as the principal advantage of ETFs over mutual funds, according to 75% of the advisers surveyed. Tax efficiency, trading flexibility and transparency of holdings were some other notable reasons.

Quote
"Index funds including ETFs have really become dominant in the industry,” says Dave Yeske, practitioner editor of the Journal of Financial Planning.

Yeske, who started as a financial planner in 1990 and was the chairman of the Financial Planning Association in 2004, added that in addition to those reasons and the general shift toward passive management, the dramatic growth in the variety of ETFs is also a chief contributor to their enduring popularity.

“ETFs track every kind of index now… which leads to greater exposure and a rising propensity for advisers to be more creative in their management approach.”

SMARTER NOT ALWAYS BETTER

In contrast to regular ETFs, smart beta ETFs did not receive nearly as much support from advisers. According to the Journal of Financial Planning’s analysis, “although the concept of “smart beta” continues to get media attention, and fund providers continue to release new ETFs products in this category, survey results indicate that only 24% of advisers have used smart beta ETFs with clients in the last 12 months.” Nevertheless, that figure is a slight 2% increase from last year.

Quote
“ETFs track every kind of index now… which leads to greater exposure," Yeske says.

For Yeske, this finding is no surprise. He attributes it to the fact that “smart beta” methods of tweaking the index weight so it’s skewed more towards value stocks is nothing new. He says it’s just a new term for an old strategy, and advisers know this.

Looking ahead, Yeske believes ETFs will not be easily outdone by other products. He says that most other investment vehicles introduced in the past that reached the same level of popularity as today's ETFs were mere fads.

“Other things will come along, but they won’t surpass ETFs,” says Yeske.

Michelle Zhou

Michelle Zhou

Michelle Zhou is an editorial intern with SourceMedia's Investment Adviser Group.