Financial advisors estimate that in two years the percentage of their client’s assets invested in exchange-traded funds will for the first time surpass their allocation to mutual funds.
According to the latest data from research and consulting firm Cerulli Associates, financial advisors expect that by 2026, 25.4% of their clients’ assets will be invested in ETFs, (a 3.8 percentage-point rise from current levels), compared with just 24.0% in mutual funds, including liquid alternatives (a 4.7% percentage-point decline from today).
The independent registered investment advisor (RIA) channel already has more than half its assets allocated to passive products and almost all advisors (90%) currently use ETFs in some way, according to the August 2024 issue of “The Cerulli Edge – U.S. Monthly Product Trends.”
This isn’t surprising, considering the majority of all financial advisors (82%) believe passive investments can help reduce overall portfolio fees. Most advisors also agree that passive options must be considered when acting as a fiduciary (66%) and that passive investments can be used to enhance returns through tactical asset allocation (63%).
Finding ETF products is getting easier for advisors as more asset managers join the ETF bandwagon. Earlier this year, BlackRock announced its plans to undergo its first mutual-fund-to-ETF conversion, joining other asset managers firms that have made this move.
Despite the interest in passive options, most advisors (83%) agree or strongly agree that active managers are suitable for certain asset classes, and almost three-quarters (72%) agree or strongly agree that active managers can provide protection against downside risk through tactical trading in volatile markets, according to the Cerulli research.
Yet nearly two-thirds of advisors (61%) agree or strongly agree that it is challenging to consistently identify which active managers will outperform indexes. This figure jumps to 80% of advisors in the independent RIA channel — the group that are the biggest users of passive products.
Active ETFs are also becoming increasingly popular in advisor portfolios. Hybrid RIA advisors currently allocate the highest percentage of assets to actively managed ETFs.
The options for active ETFs are also rapidly expanding, noted Cerulli, pointing to new offerings from BlackRock, Federated Hermes and Schwab Asset Management. Allspring has filed paperwork for six active ETFs that it plans to roll out next year.
ETF Roundup
According to Cerulli, July 2024 was the second-strongest month ever for ETF assets. They grew $329 billion (3.6%), with $119 billion of this growth attributed to net inflows. Through July, ETF assets increased this year by $1.4 trillion (16.8%), with net flows totaling $526 billion. This represents an organic growth rate of 6.5%. International equity and allocation ETFs were the only asset classes to suffer net outflows in July, said Cerulli.
