Advisors turn to sector ETFs for diversification and tactical positioning

Nov 1st, 2016 | By | Category: Equities

According to a survey conducted by State Street Global Advisors (SSGA), the asset manager behind the SPDR range of exchange-traded funds, financial advisors and wealth managers are increasingly turning to sector/industry ETFs to enhance diversification and gain tactical exposures.

Advisors turning to sector ETFs for diversification and alpha, finds SSGA

Nick Good, co-Head of the Global SPDR business at SSGA.

The survey, completed in the first quarter of 2016, comprised web-based interviews with 419 investment professionals. The channel breakdown of respondents was 34% registered investment advisors, 27% independent broker dealers, 23% national broker dealers, 7% regional broker dealers, 3% private wealth managers, 2% family offices and 4% other.

The vast majority of respondents (85%) favoured ETFs over other investment vehicles as a means to gain exposure to individual sectors or industries. More than one-quarter (26%) reported that over 20% of their assets under management are currently allocated to these funds.

“Advisors’ use of sector and industry ETFs has come a long way since the launch of the first sector SPDR ETFs in 1998,” said Dave Mazza, Head of ETF and Mutual Fund Research at SSGA. “With increasing volatility and uneven market performance intensifying the search for superior, risk-adjusted returns, demand for sector and industry ETFs will remain a core pillar in the industry’s growth and development.”

Nick Good, co-Head of the Global SPDR business at SSGA, added: “The lower for longer return environment has many investment professionals taking a more precise approach to asset allocation, which favours sectors and industries over style-based investing.”

Enhancing portfolio diversification, cited by 66% of respondents, was the top reason for incorporating sector and industry ETFs into client portfolios. Other benefits of selecting these ETFs include the ability to express tactical views (cited by 65% of respondents), the ability to generate alpha (49%), and managing risk in the equity markets (42%).

Good commented: “From 2000 to 2015, the average yearly difference between large cap growth and value is under 8% while the average difference between the best-and worst-performing sectors is 36%. Given this divergence, advisors are increasingly relying on sector and industry strategies to meet the needs of their clients.”

Across all types of investment professionals, the use of sector and industry ETFs is most prevalent by private wealth managers (92% reported some exposure to sector/industry funds), followed by independent/regional broker dealer advisors (87%), national broker dealer advisors (86%) and registered investment advisors (80%).

According to the respondents, the variables which are considered when choosing a specific sector or industry ETF, in order of importance, are liquidity, expense ratios and the fund’s holdings.

Looking ahead, 95% of financial advisors surveyed reported they plan to increase (45%) or maintain (50%) their use of sector and industry ETFs in the future.

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