The Markets June 1, 2017

ETF Vehicles Not Just Meant for Equities

Exchange-traded funds remain a marginal part of the DC retirement plan market, but recent product evolution on the fixed-income side could change that.
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A new study conducted by Cerulli Associates, in partnership with BlackRock, examines the emerging ways financial advisers are incorporating exchange-traded funds (ETFs) into client portfolios.

One clear trend to emerge from the research effort is the enthusiasm among many advisers for greater adoption of ETFs, specifically bond ETFs.

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“Since their introduction in 2002, bond ETFs have changed the way investors can access fixed-income markets,” the firms explain. “On an exchange, [there is greater] clarity of pricing and observable liquidity.”

According to Cerulli and BlackRock, the growth of bond ETFs has “charted a different course than equity ETFs.” While bond ETFs represent approximately 17% of all U.S.-listed ETFs, they represent less than 1% of assets in the U.S. bond market. “Advisers’ use of [equity] ETFs has been supported by broader secular trends of fee awareness, regulation, and the maturation of advisory businesses,” the research suggests.

Data from Strategic Insight (SI) tells a similar story. According to SI’s figures, 2016 saw continued positive net flows into exchange-traded funds (ETFs), as assets reached $2.5 trillion at year end. With net inflows of $269 billion, 2016 surpassed 2014’s previous high of $229 billion and marked the third consecutive year with inflows north of $200 billion. The majority of these inflows came during the last two quarters, with $202 billion (75%) of flows occurring during that time.

Accounting for 16% of ETF assets at the beginning of 2016, fixed-income ETFs garnered a proportionally high percentage of flows for the year, bringing in 31% of net new flows, SI reports. The $83 billion of inflows for the year represented the most productive single year for fixed-income ETFs thus far. Only in 2009 and 2011 did fixed-income funds bring in a greater share of total net flows. Intermediate-term bond and corporate bond were the top two selling fixed-income categories for the period.

Adding some context to these numbers, Jennifer Muzerall, associate director at Cerulli Associates, observes the use of bond ETFs is “broad, but not deep.” Overall, 87% of advisers report having used a bond ETF, and yet assets in these funds still significantly lag equity ETFs.

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This trend could change, however, with half of advisers surveyed by Cerulli/BlackRock planning to increase their use of bond ETFs in the next three years. One opportunity in the retirement marketplace in particular could be to use highly liquid and transparent bond ETFs to craft more sophisticated bond ladders that can closely match clients’ investment horizon and risk tolerance.

Cerulli and BlackRock conclude that advisers are “gradually recognizing that bond ETFs offer many of the same benefits afforded by equity ETFs, such as low cost, tax efficiency, and transparency.”

“Once advisers begin using bond ETFs, they recognize that bond ETFs can offer additional benefits that aid in constructing better bond portfolios, such as scalability, ease of exposure, and diversification,” argues Muzerall. Roughly one-third of advisers say that the scalability of ETFs relative to individual bonds is a major reason why they began using bond ETFs, for example.  

Data from Cerulli and BlackRock also shows bond ETF use generally “starts with broad-based core holdings,” but over time sophisticated users of bond ETF products may shift to more specialized investment objectives, such as managing sector exposure, duration, maturities, and credit risk according to unique client needs.  

“Bond ETFs are largely used as a core holding today, but sophisticated advisers are using the vehicle to tilt and diversify client bond portfolios,” Muzerall adds. “More sophisticated users of bond ETFs have already positioned client portfolios in a way that most advisers are only considering.”

The full white paper, “Bond ETFs: Financial Advisors Drive Use with Specialized Applications,” is available on http://www.Cerulli.com/. 

Client Service May 31, 2017

Millennials Have Lofty Retirement Goals

They are saving aggressively to retire early, despite obstacles, and they are actively seeking information to guide their financial decisions.
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U.S. Millennials (born between 1980 and 1997) expect to retire at age 58—earlier than those in any other western market globally—and are taking a number of steps to make it happen, according to HSBC’s latest Future of Retirement research.

To help achieve their earlier retirement goal, the research found that 80% of U.S. Millennials have already started saving for their retirement, with another three-quarters (75%) citing plans to cut expenses to save more for retirement.

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Nearly half of U.S. Millennials surveyed are willing to take on more risk in their investments to generate wealth. The research also found that investment appetite across other generations is stark. Only 27% percent of Gen X and 13% of Baby Boomers are willing to take on the same risk profile.

According to the study, U.S. Millennials are yearning to learn, with 63% actively seeking information to guide their financial decisions, compared to 49% of Gen X and 34% of Baby Boomers.

Despite their expectations and efforts to retire early, economic challenges and longer life expectancy present significant challenges to Millennials’ retirement plans.

HSBC wealth planning expert Brian Schwartz explains, “While Millennials are broadly aware of the economic and demographic challenges they face, they do not appear to have grasped how these factors could hinder their efforts to retire early and comfortably.”

For example, the vast majority of respondents (82%) anticipate higher health care costs in the future, while an additional 56% are concerned about declining social safety nets like state pensions and Social Security. Overall, respondents also anticipate that Millennials will live longer than previous generations, suggesting they will to need save for a longer retirement (62%).

Other key findings from HSBC’s Future of Retirement research include:

  • 73% of working age people in the U.S. would defer retirement for two or more years to have a better retirement income;
  • 65% of working age people in the U.S. anticipate working to some extent during retirement; and
  • 46% of working age people in the U.S. would work for longer or get a second job to save more for retirement.
This is the fourteenth Future of Retirement report in the series and represents the views of 18,414 people from 16 countries and territories. The findings are based on a representative sample of people of working age (21 and older) and in retirement, in each country or territory. The research was conducted online by Ipsos MORI between November 2016 and January 2017.

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