How Financial Advisors Are Using ETFs, Including Active ETFs

If you use a financial advisor it’s nice to have data you can use to check up on them. 

If you’re looking for a financial advisor it helps to be able to ask the right questions. 

If you’re a DIY investor, it’s good to know what the pros are up to.

If you – yourself – are a financial advisor, you can stay sharp by making sure you’re up on the latest industry trends. One of the biggest trends do-it-yourself investors and financial advisors need to put at the top of their radar – active ETF investing.

Here at The Juice, we’re all over it.

Trackinsight conducted a global survey of more than 500 professional investors to see how they’re using ETFs.

ETFs have increased in popularity, in part, because they have lower and fewer fees than mutual funds. Plus, they give investors more flexibility to buy and sell on the fly rather than having to wait for the market close. 

In terms of broad classifications, equity ETFs dominate with about 24% of survey respondents keeping more than 60% of their portfolios in this area. Just 5% of the financial pros surveyed keep more than 60% of their portfolios in fixed income ETFs. One-third don’t use fixed income ETFs at all. 

• 56% anticipate increasing their equity ETF exposure in the next 2-3 years. 
• 40% intend to up their fixed income ETF exposure over the same timeframe. 

Foreshadowing Wednesday’s sample ETF portfolio installment, 72% say they use ETFs for “strategic asset allocation,” which indicates that they’re adhering to a buy-and-hold strategy. About half of those surveyed say they “use ETFs to gain exposure to a specific theme, sector or factor.” 

This is where things get interesting. 

• A majority of investors plan to increase their exposure to actively-managed and thematic ETFs over the next two to three years. 

This jibes with what we’re seeing. Active ETFs are all the rage right now. And we think it’s more than a fad. They’re here to stay.

What Do Active ETFs Replace? 

In the United States, roughly 40% of survey respondents report using active ETFs to replace passive ETFs, actively-managed mutual funds and index mutual funds. Approximately one-quarter replace direct investing (stock picking) with active ETFs. If you take the US out of the mix, these numbers are all significantly lower globally. 

While money managers will continue to increase their active ETF exposure and, at times, use active ETFs as replacements, it’s important to point out  that 35% of respondents have never used active ETFs to replace passive ETFs, direct investing or mutual funds. Rather, they consider active ETF investing a complementary strategy to use alongside other types of investments.   

Across the universe of financial pros utilizing active ETFs: 

• 44% invest in them because of their lower fee structure, relative to traditional mutual funds. 
• 43% use active ETFs because they provide diversification. 
• 37% like active ETFs because of the potential for outsized returns compared to passive investments. 

Among the biggest challenges active ETFs face: not enough selection, not a long enough track record and, in some cases, they can carry higher fees than passive investments. 

On the not enough selection issue, that’s changing fast. Over the next few weeks and months, The Juice will introduce you to some of the newest entrants into the burgeoning active ETF marketplace. 

The Bottom Line: The idea of using active ETFs to replace or use alongside other investment vehicles strikes us. While the Trackinsight paper gently framed this as an either/or proposition, the word from financial pros was clear: You can have it both ways. 

Money managers are using active ETFs as replacements where it makes sense, but, more often than not, they function as complementary to whatever they already have their clients in. 

When we present our sample ETF portfolios over the next few weeks and months, we’ll provide ideas on how to mix different types of passive, index-tracking ETFs with actively-managed ETFs. While stock picking is fun – and something many of us like to think we’re good at – using a healthy mix of ETFs might provide an easier route to diversification, not to mention big returns, particularly of long-term investors.

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