State Street Global Advisors (SSGA) published a new survey showing financial advisers and wealth managers are widely using exchange-traded funds (ETFs) to gain more nimble exposure to individual sectors or industries within client portfolios.
The survey polled more than 400 advisers, finding the strong majority (85%) are using ETFs in this way. More than one-quarter of survey respondents further report that over 20% of their assets under management are allocated to sector/industry ETFs.
It should be noted that SSGA is a prevalent provider of this type of ETF via its SPDR product line, but the firm says “the lower for longer return environment” has undoubtedly inspired investment professionals to take “a more precise approach to asset allocation.” This favors the nimbleness and lower costs of ETFs over mutual funds, according to SSGA, and it also suggests sector-aware investing is increasingly important over traditional style-based investing,
Advisers’ top reasons for incorporating sector and industry ETFs into client portfolios include portfolio diversification (cited by 66% of respondents); expressing tactical views (65%); obtaining alpha (49%); and managing risk in the equity market (42%).
According to Nick Good, co-head of the global SPDR business at State Street Global Advisors, from 2000 to 2015, the average yearly difference between large cap growth and value was under 8%, while the average difference between the best-and worst-performing sectors was 36%.
“Given this divergence, advisers are increasingly relying on sector and industry strategies to meet the needs of their clients,” he proposes.
Across all types of investment professionals, the use of sector and industry ETFs is most prevalent by private wealth managers, with 92% reporting they had some exposure to the sector and/or industry funds. This is followed by independent and regional broker/dealer advisers (87%), national B/D advisers (86%) and registered investment advisers (80%). The most important variables these investment professionals consider when choosing a specific sector or industry ETF are liquidity, expense ratio and the fund’s holdings.
In terms of forward-looking data, SSGA finds that nearly all (95%) financial advisers polled plan to either increase (45%) or maintain (50%) their use of sector and industry ETFs in the future.
A full copy of the report can be downloaded on SSGA’s website.