Fueled by Adviser Usage, ETF Assets Explode

Registered independent advisers (RIAs) plan to increase their ETF usage, according to a new Strategic Insight report.

Assets in global exchange-traded funds (ETFs) topped $725 billion at the end of 2008, according to the report. In a news release Strategic Insight predicted that worldwide ETF assets will eclipse the $1 trillion mark within two years.

According to the report, U.S.-listed exchange-traded products held more than $530 billion at the end of last year and drew a record $176 billion in net inflows last year. ETFs in Asia and Europe captured more than $90 billion last year.

Taken together, investors worldwide put nearly $270 billion into ETFs in 2008, the report said.

“The ETP (exchange-traded product) business has grown steadily through bull and bear markets,” said Sonia Mata, co-author of the Strategic Insight ETF report and associate director of US Research for the consulting company, in the release. “These flexible vehicles can be used for short-term tactical positions and as building blocks for diversified investor portfolios.”

Distribution Channels

Other findings of the Strategic Insight report, according to the news release, include:

  • Some 40% to 50% of ETF assets reside with institutions, including pension funds, hedge funds, endowments, proprietary trading desks, and mutual funds. Fifty percent to 60% of ETF assets reside with retail users, including individuals served by financial advisers and the direct retail channel;
  • ETFs offer access to a variety of asset classes and strategies; there are now more than 820 different ETFs trading in the U.S.;
  • The simultaneous expansion in the industry of asset allocation and fee-for-advice compensation models help support ETF growth. More investors see ETFs as vehicles for simple index-tracking exposure in asset-allocation. Expanded use of fee-based distribution (including the growth of RIAs and brokerage wrap programs) creates a larger framework within which financial advisers can use ETFs;
  • RIAs, the early retail adopters of ETFs, generally plan to boost their use of ETFs, according to a survey. Among RIAs that use ETFs, half indicated that their ETF use had increased by 25% or more in the past two years, and 70% plan to increase their ETF use even further (see “Advisers Report ETF Uptake).

ETF use is also growing rapidly in Europe and Asia, which are mostly institutional markets and are several years behind the U.S .ETF market in terms of development, Strategic Insight said.