Financial advisors are projected to hold more of their clients’ assets in exchange-traded funds (ETFs) than in mutual funds for the first time, according to a recent report by Cerulli Associates. The report states that nearly all advisors use mutual funds and ETFs, with about 94% and 90% of them utilizing these investment vehicles, respectively.
Advisors anticipate that by 2026, a larger portion of client assets, approximately 25.4%, will be allocated to ETFs compared to the 24% allocated to mutual funds. If this trend materializes, ETFs would become the primary investment vehicle for wealth managers, surpassing individual stocks, bonds, cash accounts, annuities, and other investment types.
Currently, mutual funds represent 28.7% of client assets, while ETFs account for 21.6%. The popularity of ETFs has been on the rise due to factors such as tax advantages, lower expenses, liquidity, and transparency, making them an attractive option for investors and financial advisors.
ETFs offer advantages such as tax efficiency, as they allow managers to trade securities without triggering taxable events, unlike mutual funds. Lower fees and greater transparency are additional benefits that contribute to the appeal of ETFs over mutual funds. Index ETFs, for example, have lower average expense ratios compared to index mutual funds, resulting in reduced costs for investors.
While ETFs provide benefits like intraday trading and daily portfolio disclosure, they also have limitations. Mutual funds continue to dominate workplace retirement plans like 401(k) accounts, as ETFs do not offer significant advantages in tax-advantaged retirement accounts. Additionally, ETFs cannot close to new investors, which may pose challenges for funds with specialized investment strategies as they attract more investors.
