Financial advisors are on the brink of a major shift in how they manage their clients’ assets. A new report by Cerulli Associates predicts that advisors will soon hold more of their clients’ assets in exchange-traded funds (ETFs) than in traditional mutual funds for the first time.
Currently, nearly all advisors use mutual funds, with about 94% incorporating them into their clients’ portfolios. ETFs are also widely utilized, with approximately 90% of advisors including them in their investment strategies. However, advisors estimate that by 2026, a larger share of client assets, 25.4%, will be invested in ETFs compared to the 24% allocated to mutual funds.
If this prediction holds true, ETFs will become the primary investment vehicle for wealth managers, surpassing individual stocks and bonds, cash accounts, annuities, and other types of investments. Currently, mutual funds account for 28.7% of client assets, while ETFs make up 21.6%.
The rise of ETFs can be attributed to several key factors that differentiate them from mutual funds. ETFs offer lower taxes and fees, making them more cost-effective for investors. Unlike mutual funds, ETF managers can trade securities within the fund without incurring capital gains taxes for shareholders. This tax efficiency allows investors to maximize their returns by avoiding unnecessary tax burdens.
Additionally, ETFs provide investors with greater liquidity and transparency compared to mutual funds. Investors can trade ETFs throughout the day, similar to stocks, while mutual fund trades are executed once a day after the market closes. ETFs also disclose their portfolio holdings daily, giving investors more visibility into their investments compared to the quarterly disclosures of mutual funds.
Despite the advantages of ETFs, there are limitations to consider. Mutual funds are likely to maintain their dominance in workplace retirement plans like 401(k) accounts due to their tax advantages. ETFs also have restrictions, such as being unable to close to new investors, which can impact the fund’s performance in niche or concentrated investment strategies.
Overall, the shift towards ETFs in financial advisors’ portfolios reflects the evolving landscape of investment management. By embracing ETFs’ benefits of lower costs, tax efficiency, liquidity, and transparency, advisors can better serve their clients and adapt to the changing demands of the market.
