What Advisers Don’t Understand About ETFs

Risks and use of exchange-traded funds (ETFs) in portfolio construction: yes. Liquidity and trading of ETFs: not so much.

According to research from Cerulli Associates, sponsors of ETFs report that ETF liquidity is the subject advisers understand the least, along with how ETFs trade. This suggests these two topics should remain top of mind for providers when developing educational programs, said Alec Papazian, associate director at the Boston global analytics firm.

“Advisers may be aware of how ETFs are structured,” along with some of the benefits they provide, Papazian told PLANADVISER, “but they are still wary of using the products, given the additional considerations surrounding trading compared with mutual funds.”

In The Cerulli Edge-U.S. Asset Management Edition for July 2013, the firm examines educational strategies, focusing on white papers, ETF education, and organizational structure and staffing.  The type of assistance advisers require from ETF sponsors varies significantly, Papazian said.

There is no single statistic to point to as a simple measure of an ETF’s liquidity, he noted. “Understanding that the trading volume is not an accurate representation of the liquidity of the product is simple to discuss. It becomes more complicated when examining the liquidity of the underlying securities within the portfolio.”

Cerulli encourages ETF sponsors to focus on new advisers in order to further increase adviser adoption. More advanced educational initiatives will help increase ETF allocations among advisers who already using ETFs, the paper said. In addition, sponsors should continue to provide basic education for advisers and clients.     

“Creating programs to meet educational needs of advisers across the spectrum of adoption and sophistication is a difficult task, but it will be necessary for some time,” Papazian said. 

More information on the report, including how to purchase a copy, is at Cerulli’s website