Advisors driving increased use of bond ETFs, finds Cerulli

Jun 5th, 2017 | By | Category: Fixed Income

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The financial advisor community is increasingly adopting a greater proportion of bond ETFs within their portfolios, according to a study by international research house Cerulli Associates and sponsored by BlackRock. The most experienced users have already adopted the vehicle at the core of their portfolios and many others are taking advantage of the potential benefits ETFs offer alongside managed products and individual bonds.

Advisors driving increased use of bond ETFs, finds Cerulli

Cerulli’s study found that 87% of advisors surveyed acknowledged using bond ETFs as part of client portfolios.

To conduct the study, Cerulli issued a survey to 378 financial advisors across the US, in December 2016 and January 2017 to ask them about their practices and specifically their use of bond ETFs. Respondents needed to manage at least $50 million in assets and take discretion over at least half of client assets. Respondents were diversified among business models (wirehouse, independent, registered investment advisor, etc). The original distribution of respondents was weighted to reflect Cerulli’s overall sizing of the financial advisor marketplace.

The results of the study point to strong and growing use of bond ETFs within advisors’ portfolios. In particular Cerulli noted five key themes which emerged from the report.

Firstly, secular trends of growth in advisory and fee compression continue to fuel the growth of ETFs. This trend was supported by broader secular trends, including heightened fee awareness, regulation, and the growth of the advisory business. Furthermore, Cerulli points out the shift in investor preferences, including greater transparency, efficiency, and accessibility, has led to a rapid evolution within the advisory landscape. This has driven more advisors to consider lower-cost vehicles and put a greater emphasis on asset allocation using a wider range of vehicles, such as ETFs, to achieve client goals.

The responses from participants also displayed a clear progression beyond equity ETFs, the first ETF products introduced to the market and used by advisors. Indeed, 87% of advisors reported using bond ETFs and half planned to increase their use in the next three years. Survey results indicated advisors plan on decreasing their use of individual bonds and bond mutual fund in the next three years.

Thirdly, the survey indicated advisors believe bond ETFs offer different benefits than their equity ETF counterparts. While bond ETFs have many of the same potential benefits as equity ETFs, advisors aren’t as familiar with them. However, they do believe some specific characteristics relate more to bond ETFs than equity ETFs, including diversification and ease of exposure. About one third of advisors also said that the scalability of ETFs relative to individual bonds was a major reason why they began using bond ETFs.

Fourth, there remains a segment of advisors who continue to prefer mutual funds and individual bonds, especially when implementing tactical allocations. Some advisors cited active management and familiarity with the mutual fund structure as their primary reasons for using mutual funds. Other advisors cited control over client portfolios and defined maturities as a reason to use individual bonds. However, Cerulli also states that moderate and heavy users of ETFs were more likely to report plans to increase bond ETF usage, moving further away from individual bonds.

Lastly, Cerulli found that advisors were most likely currently using bond ETFs as a relatively simple way to establish a bond core holding—25% “always” used bond ETFs for broad market exposure and other 21% uses bond ETFs to diversify equities. Advisory practices managing more than $500 million or those that have a CIO were more likely than the advisor population as a whole to use more specialized application of bond ETFs. These included using bond ETFs to manage sector exposure, manage duration, manage maturities, or manage credit risk.

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