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Adoption rates for exchange traded funds have jumped as they gain popularity among financial advisers and investors, particularly younger ones recent research confirms.
A State Street Global Advisors survey has found that US individual investors and financial advisers have incorporated ETF products into portfolios at higher rates in recent years, led by high adoption of the funds among millennials.
Some 45 per cent of individual investors reported using ETFs as investment vehicles as of the end of April, compared with 40 per cent who reported doing so in the fourth quarter of 2022, the last time SSGA conducted the survey.
The usage was led by millennials, 58 per cent of whom reported using them in their portfolios, compared with 47 per cent and 37 per cent of Generation X and baby boomer investors, respectively, the survey found.
This article was previously published by Ignites, a title owned by the FT Group.
In the survey, US respondents pointed to diversification benefits, flexibility in trading, lower average expense and providing exposure to specific sectors of the economy as their top reasons for choosing ETFs.
Some 70 per cent of financial advisers surveyed said they routinely recommend the products, the survey found.
The general lack of minimum investment requirements has played a particularly significant role in ETF popularity among millennials, according to Ryan Jackson, an analyst at Morningstar.
“When you compare a lot of these ETFs to mutual funds, oftentimes it’s just a matter of how much it costs to buy shares that makes them a much more accessible vehicle,” Jackson said.
“A lot of those benefits in the ETF wrapper have just become more widely known among investors,” he said.
But it can also be difficult for older investors who have invested in mutual funds to sell them in favour of ETFs, because they could incur taxes on capital gains, Jackson said.
Nevertheless, ETFs have been able to “achieve mainstream adoption,” according to David LaValle, Grayscale’s global head of ETFs.
“[ETFs] offer a myriad of benefits . . . Paired with access to data and industry education, it is no surprise that younger generations prefer ETFs, as they seek to build their desired financial portfolio and aim to make investments in asset classes and themes reliably and conveniently,” LaValle said.
Keith VanOrden, head of retail distribution for Los Angeles-based TCW, said that it had been looking to ensure that clients had access to the “right” products, as it noticed more interest in ETFs.
He pointed to recent mutual-fund-to-ETF conversions TCW announced this year as part of that effort, as well as the firm’s recent acquisition of Engine No.1’s ETF business as a way of “meeting investors where they are,” he said.
“We’re really good at active fixed income, and we’re really good at managing concentrated equity portfolios, so, while we’ve done that historically in mutual funds and [separately managed accounts], our ability to deliver that message in ETFs actually makes our story to advisers that much easier,” VanOrden said.
JPMorgan Asset Management has made the distribution of active ETFs to advisers and institutional clients a focus, according to Jed Laskowitz, chief investment officer and head of global asset management solutions.
Despite the growth that JPMorgan’s ETF franchise had seen through its flagship active JEPI, JEPQ and JPST products, the industry is still “at the beginning of the ETF trend”, Laskowitz said.
“ETFs have long been synonymous with the potential benefits of cost and tax efficiencies, along with liquidity and transparency. The most recent uptake has been driven by the expansion of active ETF options, giving way to more traditional strategies now available in a preferential product,” Nate Williams, team director of ETF distribution at Franklin Templeton, said.
SSGA conducted the survey in April of more than 300 individual investors, more than 200 financial advisers and 100 institutional investors in the United States.
*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.