Advisers Attracted to Lower Fees of ETFs

While exchange-traded-fund (ETF) assets will continue to grow rapidly, ETF providers see 401(k) accounts as a continued challenge, according to Cerulli Associates.

Half of ETF providers expect ETFs to continue to enjoy explosive asset growth, and another 40% said ETF asset growth will be moderate but still outpace index and actively managed mutual fund growth, according to data from Cerulli. “Compared to mutual funds, the ETF market is still small, but will continue to grow at a rapid pace,” according to the Cerulli report.

However, providers rate the biggest challenges to the ETF industry to be insufficient capital available for new ETFs (50% rate it as a major challenge and 30% rate it as a moderate challenge) and inability to support 401(k) accounts (40%, major challenge; 60%, moderate challenge). So, that means 100% of ETF providers said the inability to support 401(k) accounts are at least a moderate challenge for the ETF industry.

Financial advisers are most interested in adopting ETFs because of lower fees of ETFs compared to mutual funds and other products (46% said it’s very influential and 38% said it’s “somewhat influential”). Interestingly, client interest is low on the list of reasons advisers adopt ETFs (13% said it is very influential and 44% said it is moderately influential).

Cerulli also noted that index ETFs appear to be a preferred vehicle when pursuing an indexing strategy. Year-to-date in August 2009, index ETFs saw $53 billion in net inflows, compared to $37 billion for index mutual funds. 

The Cerulli Edge—U.S. Asset Management Edition can be purchased at