The rise of model portfolios and the increasing availability of actively managed ETFs, along with tax efficiency and intra-day liquidity, are some factors leading the retail channel to become the main growth driver behind exchange traded funds. That was the conclusion of a recent “Cerulli Edge” report from consulting firm Cerulli & Associates. The firm estimates that between 2012 and 2022, retail clients' share of total ETF assets rose from 61% to 80%.
At year-end 2022, the retail financial advisor intermediary channels owned $4.3 trillion, or 66%, of total ETF assets in the market, according to Cerulli. Within that group, wirehouses and independent RIAs owned the most ETF assets, holding $1.2 trillion and $1.1 trillion, respectively. Cerulli also found ETFs account for 36.2% of total professionally managed assets among independent RIAs and 24.9% of total assets among hybrid RIAs.
In the future, financial advisors overall plan to increase their allocations to ETFs to approximately 24.4% by 2025 from 20.7% in 2023. Independent RIAs report they would like to grow their allocations to 39.0% from 34.9% and hybrid RIAs plan to grow their allocations to 32.7% from 28.7%. Wirehouses estimate they will increase allocations to 19.6% in 2025 from 17.4% in 2023 and independent broker/dealers to 21.3% from 17.3%.
Financial advisors across the board now expect ETFs will account for a higher wallet share of client’s portfolios in two years than any other vehicle type, including mutual funds, according to Matt Apkarian, associate director, product development, at Cerulli. By 2026, advisors expect ETFs will make up 25.5% of portfolios, while mutual funds will account for 23.5%. “This is the first time that we’ve seen this,” Apkarian said.
He said much of that increased ETF adaption is being driven by advisors under 45 years old. It also focuses primarily on advisors with clients in the middle net worth tier—those with between $100,000 and $5 million in assets—for whom the ETF’s tax advantages are a major selling point, Apkarian added.
The proliferation of model portfolios is another factor contributing to the increasing use of ETFs by financial advisors. Based on surveys of asset managers and third-party strategist model providers, Cerulli found they had an average 31% asset-weighted allocation to proprietary ETFs and a 23% average asset-weighted allocation to non-proprietary ETFs. Today, the share of financial advisory firms that rely primarily on model portfolios is still relatively small, at 12%. However, Cerulli estimates that approximately 24% more advisors should be or eventually will be primarily using model portfolios.
“At this point, ETFs make up more than half of model portfolio assets, so more than mutual funds and way more than separate accounts,” said Apkarian. “We expect for model portfolio use to continue on the trend it’s been on. And so, that’s going to boost the use of ETFs.”
On top of the above factors, “the proliferation of active ETFs is going to be a huge tailwind,” Apkarian said. “For the longest time, ETFs were just indexed, and now they are increasingly active, so advisors who had not used a lot of ETFs because they believed strongly in active management will take advantage of the active management being offered.”
According to Cerulli, 73% of advisors who have yet to use ETFs in their portfolios cited uncertainty about how best to use them as one of the biggest factors in their hesitance. Another 70% said explicit ETF transaction costs were holding them back. Other major concerns included execution price diverging from NAV (65%) and the ETF’s price diverging from NAV (63%), along with concerns about liquidity in a drawdown scenario (46%), a preference for mutual funds (43%) and a preference for active management (40%).
Meanwhile, 27% of surveyed advisors who have avoided actively managed ETFs cited the fact these vehicles don’t have a long enough track record as a major reason for their decision. Another 20% cited a lack of a clear client benefit compared to active mutual funds, and 16% said active ETFs were unavailable on their firms’ platforms. For 13%, a major factor was the fact that they felt active ETFs were too expensive.