Exchange-traded funds (ETFs) are quickly emerging as the preferred choice for financial advisors, surpassing mutual funds for their liquidity, ease of use, and wide array of uses. As highlighted by the latest Cerulli Edge report on asset and wealth management in the Americas, there is a noticeable shift in the allocation of assets with financial advisors predicting that by 2026, 25% of their clients’ assets will be invested in ETFs compare to 24% in mutual funds.
The transition is revealing a new need for RIAs and wealth management community – more ETF wholesalers.
The Rise of ETFs
ETFs have gained significant traction across various channels, particularly among wirehouses and RIAs, which together account for more than half (54.6%) of retail ETF assets. This trend is driven by the increasing adoption of ETFs as a versatile vehicle capable of spanning different asset classes. The flexibility and cost-efficiency of ETFs also makes them an attractive alternative to mutual funds, as they offer intraday liquidity, continuous trading, and portfolio transparency, often with lower expenses and greater tax efficiency.
The integration and increasing use of model portfolios has also aided in the preference of ETFs over mutual funds. Advisors seeking to customize models can easily integrate ETFs for tax optimizes strategies or concentrate on specific geographic regions to gain certain exposures. ETFs are also less likely to distribute taxable gains than mutual funds, making them an obvious choice for tax-minded portfolios and strategies.
The Role of Wholesalers
As ETFs continue to dominate, financial advisors are increasingly relying on their connections with wholesalers for competitive product information and support. Nearly half (41%) of advisors consider the insights from wholesalers to be very valuable, especially regarding access to portfolio mangers or product specialists (32%), according to the Cerulli report. Danil Shapiro, director at Cerulli, emphasizes that wholesalers can foster lasting relationships with advisors by serving as a source of product expertise, particularly as ETFs gain popularity across new asset classes. To meet this demand, asset managers are encouraged to invest in ETF specialists who can provide the necessary product knowledge that advisors expect and value.
This presents as an opportunity for the wholesaler community, who previously might have focused their efforts on the mutual fund market. ETFs are quickly emerging, and their trends have shifted from passive to active, making the selection of manger and the wholesaler as the educator all the more pronounced.
Educational Support and Market Performance
Cerulli’s research indicates that client-approved educational or marketing materials (37%) are also highly valued by advisors. As asset managers offer ETF education through their wholesale teams and specialists, advisors are encouraged to leverage their home office’s product information to expand their ETF usage. Shapiro notes that advisor allocations to ETFs increase as they grow more comfortable with the product, driven by enhanced product education. As advisors explore new ways to implement ETF products throughout their portfolios, asset managers play a crucial role in facilitating the adoption and education of the vehicle.
Vital to this education is the wholesaler. ETF wholesalers are oftentimes viewed more as consultants than traditional wholesalers, as ETF wholesalers typically cover a smaller number of products than their mutual fund counterparts. This allows ETF wholesalers to have a deeper understanding of their product lineup, which can make-or-break an RIA’s allocation into specific ETFs.
ETF portfolio integration is also being driven by certain key trends in the ETF market, which wholesalers can capitalize on to distinguish themselves and their offerings.
Key Trends in the ETF Market
- Actively Managed ETFs: Active ETFs are quickly gaining market share from mutual funds, offering investors a dynamic approach and wholesalers a pocket of opportunity.
- ETF Fees: While ETF fees have traditionally declined, this trend may stabilize as actively managed ETFs gain prominence. Management fees will mean wholesalers will have a larger responsibility to provide the value-add over mutual funds.
- Option-Based ETFs: This variety have experienced strong growth, becoming a significant source of volatility supply, contributing to market stability for most of 2024 as some of these strategies (like covered calls) provide buffers against losses.
- Single-Stock and Multi-Asset ETFs: These options are emerging as novel ways to gain leverage or manage single-stock exposure, although multi-asset ETFs pose challenges for issuers.
Global Overview and Future Outlook
The global ETF market has captured significant interest, with total assets under management reaching approximately $13 trillion by the end of May 2024, up from $10.1 trillion the previous year. The growth is reflected across major regions. With around 3,500 ETFs listed, the U.S. holds approximately $9 trillion in assets. Broad-based domestic equity ETFs dominate, although their market share has decreased. EMEA-listed ETFs and exchange-traded commodities hold nearly 2.0 trillion euros, making up 16% of global ETF assets under management, offering greater diversity in non-equity ETFs compared to U.S. markets. In the Asia-Pacific market with around 3,600 ETFs listed, this region accounts for about $1.5 trillion in assets under management, focusing heavily on Japan-centric equity ETFs.
As the ETF market remains an evolving and dynamic space, the full integration of different ETF offerings inside RIAs will hinge on wholesalers and their knowledge of how to deploy them. The actively managed sector is anticipated to be a key area of interest, alongside ongoing innovation in option- based ETFs and the expansion of non-equity products like fixed income ETFs. As ETFs continue to capture market share, asset managers and those who sell to them must remain agile, embracing how to adapt to these new areas of opportunity.
