Advisors Embracing ETFs, Schwab Says

March 07, 2011

ETFs are gaining ground among independent advisors, Schwab says.

Exchange-traded funds, touted for their lower costs, tradability and niche exposures, are outshining other investment vehicles among independent advisors, and their growing popularity shows no sign of abating, according to a study released today by retail broker and money manager Charles Schwab.

Schwab found that 84 percent of the advisors it surveyed used ETFs in their strategies. What’s more, about a third of the respondents said they plan to expand their ETF usage in the next six months, “the most of any investment vehicle,” the company said in a press release. The study included more than 1,300 advisors with a total of almost $285 billion in assets under management.

More than 80 percent of advisors listed diversifying a client’s portfolio as the reason for liking ETFs, and half of them use ETFs to maintain market exposure while making portfolio adjustments, the company said. Also, 40 percent of advisors said they like ETFs as a tool to manage risk.

“Lower cost (75 percent), trading flexibility (66 percent), and access to specialized markets (55 percent) are the top three reasons that advisors say they started using ETFs,” Schwab noted.

Schwab’s findings are broadly consistent with views in the ETF world that independent advisors have more quickly embraced the exchange-traded fund because they have also adopted fee-based compensation models. While wire houses are encouraging the adoption of fee-based pay, many advisors in that world are loath to give up commissions and sundry fees associated with mutual funds.

Among the various ETF products independent advisors favor, equity ETFs were the preferred asset class, with more than three-quarters of those surveyed saying they invest in equity ETFs, and 28 percent noting that they plan to invest more in them in the next six months.

International ETFs were equally popular, with 70 percent of advisors including them in their strategies, while fixed-income ETFs were used by 60 percent of the respondents, the company said.

Advisors Bullish On Economy

All in all, the growing interest in ETFs is going hand in hand with growing optimism among advisors about the economy, particularly as it relates to equity markets. More than 75 percent of those surveyed said they expect to see a rise in the S&P 500 in the next six months, up from 63 percent in July.

“While there is still uncertainty in the markets and in various parts of the world, independent investment advisors clearly think we are turning the corner economically,” Bernie Clark, executive vice president and head of Schwab Advisor Services, said in the press release.

Many expect U.S. Treasury yields to rise and inflation to increase ahead, the report revealed. Most also considered the Federal Reserve’s quantitative easing program and an extension of the Bush-era tax cuts to be favorable to the stock market and the economy as a whole.

Advisors are putting their money where their mouths are with plans to invest more in equities in the next six months. About 39 percent of those surveyed said they were looking at domestic large-caps ahead, up from 27 percent in July.

Some 28 percent of advisors plan to invest more in international large-cap emerging markets funds, while 22 percent want to increase investment in small-cap emerging market strategies ahead, Schwab said. By contrast, only 6 percent plan to increase exposure to fixed income.

Schwab has said its clients held more than $110 billion in ETF assets at the end of 2010, a 34 percent year-on-year increase, compared with overall ETF industry growth of 28 percent.

The company also began rolling out a lineup of proprietary exchange-traded funds in November 2009. Its ETF assets totaled almost $3.55 billion as of March 4, 2011, according to data compiled by



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