The growth of model portfolios and the increasing availability of actively managed ETFs, along with tax efficiency and intraday liquidity, are some of the factors driving the retail channel to become the key driver of growth after exchange traded funds. This was the conclusion of a recent “Cerulli Edge” report by consulting firm Cerulli & Associates. The firm estimates that between 2012 and 2022, the share of retail clients in total ETF assets increased from 61% to 80%.
At the end of 2022, retail financial advisor brokerage channels held $4.3 trillion, or 66%, of total ETF assets in the market, according to Cerulli. Within this group, wire and independent RIAs owned the majority of ETF assets, holding $1.2 trillion and $1.1 trillion, respectively. Cerulli also found that ETFs account for 36.2% of total professionally managed assets among stand-alone RIAs and 24.9% of total assets among hybrid RIAs.
Going forward, financial advisors generally plan to increase their allocations to ETFs to approximately 24.4% by 2025 from 20.7% in 2023. Independent VNRs report that they want to increase their allocations to 39.0 % from 34.9% and hybrid RIAs plan to increase 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 advisers across the board now expect ETFs to make up a higher portion of a client's portfolio portfolio in two years than any other type of vehicle, including mutual funds, according to Matt Apkarian, associate director, development of product, in Cerulli. By 2026, advisers expect ETFs to make up 25.5% of portfolios, while mutual funds will make up 23.5%. “This is the first time we've seen this,” Apkarian said.
He said much of the growth in ETF adoption is being driven by advisers under 45. It also focuses primarily on advisers with mid-net-worth clients — those with $100,000 to $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 increased use of ETFs by financial advisors. Based on surveys of asset managers and third-party strategist model providers, Cerulli found that they had a 31% average asset-weighted allocation for proprietary ETFs and a 23% average asset-weighted allocation for 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 primarily use model portfolios.
“At this point, ETFs make up more than half of the model's portfolio assets, so more than mutual funds and much more than separate accounts,” Apkarian said. “We expect the use of the model portfolio to continue in the trend it has been. And so, this will increase the use of ETFs.”
On top of the above factors, “the spread of active ETFs is going to be a headwind,” Apkarian said. “For the longest time, ETFs were just indexed and now they're increasingly active, so advisors who hadn't used many ETFs because they believed strongly in active management will benefit from the active management that's being offered.”
According to Cerulli, 73% of advisors who have not yet used ETFs in their portfolios cited uncertainty about how best to use them as one of the biggest factors in their hesitation. Another 70% said explicit ETF transaction costs were holding them back. Other top concerns included the strike price changing from NAV (65%) and the ETF price changing from NAV (63%), along with liquidity concerns in a withdrawal scenario (46%), a preference for funds common (43%) and a preference for active management (40%).
Meanwhile, 27% of advisors surveyed who have avoided actively managed ETFs cited the fact that these vehicles don't have a long enough track record as a key reason for their decision. Another 20% cited the lack of a clear client benefit compared to active mutual funds, and 16% said active ETFs were not available on their firms' platforms. For 13%, a major factor was that they thought active ETFs were too expensive.