The rise and rise of adviser ETF usage

According to the BetaShares/Investment Trends 2015 ETF Report, 40% of all advisers now recommend ETFs to clients, up from 33% in 2014. A further 19% intend to start using them in the next 12 months.

The pace of adviser take-up of ETFs, particularly over the past two years, has been rapid, and it’s doubtful that it will slow down much in the future. In the United States, the world’s most mature ETF market, over 80% of advisers now recommend ETFs to clients, according to a recent study by the US FPA Research and Practice Institute.

What’s even more interesting is that, for the first time, the 2015 study revealed that the proportion of advisers recommending ETFs to clients has eclipsed that of managed funds. While managed funds still do a lot of business through the adviser channel, with 78% of US advisers recommending them to clients, this has come down from 85% in 2006.

This seems to indicate that managed funds are slowly but surely experiencing a drop in popularity among US advisers – particularly when they are comparing them to the transparency and cost benefits that ETFs offer.

US ETF provider WisdomTree, which formed a strategic alliance with BetaShares in Australia last year, is experiencing similar surging demand from the adviser channel. Over a third (34%) of WisdomTree’s assets under management is now held through advisers, representing their second-largest business channel after full-service brokers.

Interestingly, WisdomTree has seen their international equities products exceed their domestic equities funds in terms of popularity as the US ETF market expands. Their most popular exposures among advisers now include Indian, German and Japanese equities, as well as broad-based European equities exposures.

This would seem to indicate that not only are advisers embracing the transparency and low-cost benefits of ETFs, but also the easy access they provide to markets that may traditionally have been difficult to include in a client portfolio.

We can see this trend beginning to take off in the Australian ETF market, where developed international equities were the most popular product category in 2014, attracting over $1.4 billion of inflows. When asked to nominate their top three reasons for using ETFs, 50% of planners in the BetaShares/Investment Trends 2015 ETF Report nominated access to overseas markets. While this still rated below low cost (89%) and diversification (71%) as a top benefit, it’s clear that more Australian advisers are starting to realise the value of the international exposure they can gain through ETFs.

While advisers in Australia have traditionally been early adopters of the broad-based ‘buy and hold’ domestic equities ETFs, we expect to see the market developing in a similar way to the US, with adviser clients increasingly looking at ways they can build diversified portfolios through new and different exposures. A large number of the 42 new exchange-traded products launched so far this year have focused on the global equities space, and we expect product development to continue along this theme, with providers expanding the options available to gain exposure to different global markets and sectors.

While we may still have a way to go until ETFs overtake managed funds in terms of adviser recommendations here in Australia, it’s clear that the growing variety of exposures available, combined with the well-known cost, transparency and liquidity benefits that ETFs offer, presents a powerful opportunity for advisers to add value to their clients’ experience.

Alex Vynokur, managing director, BetaShares