The Rise of Exchange Traded Funds (ETFs) in Retail Channels

In recent years, the retail channel has emerged as a key growth driver for exchange traded funds (ETFs), fueled by factors such as the popularity of model portfolios and the availability of actively managed ETFs. A recent report from Cerulli & Associates highlighted this trend, indicating that retail clients now account for 80% of total ETF assets, up from 61% in 2012.

The Retail Advisor Landscape

At the end of 2022, retail financial advisors held $4.3 trillion, representing 66% of total ETF assets. Among these advisors, wirehouses and independent Registered Investment Advisors (RIAs) stood out, with $1.2 trillion and $1.1 trillion in ETF assets, respectively. Cerulli’s findings also revealed that ETFs make up a significant portion of total assets for independent RIAs and hybrid RIAs.

The Future Outlook

Looking ahead, financial advisors plan to increase their allocations to ETFs significantly by 2025. Independent RIAs aim to grow their ETF allocations to 39.0%, while hybrid RIAs target a 32.7% allocation. Wirehouses and independent broker/dealers also plan to ramp up their ETF allocations in the coming years.

Advisors across the board anticipate that ETFs will play a more prominent role in client portfolios compared to other investment vehicles like mutual funds. By 2026, ETFs are expected to make up 25.5% of portfolios, surpassing mutual funds at 23.5%. This shift is driven by younger advisors and clients in the middle net worth tier.

Model Portfolios and Active ETFs

The rise of model portfolios has also contributed to the increasing use of ETFs among financial advisors. Cerulli’s research shows that ETFs now account for more than half of model portfolio assets, making them a preferred choice over mutual funds and separate accounts.

Additionally, the proliferation of actively managed ETFs is expected to drive further adoption among advisors who previously favored active management strategies. This shift broadens the appeal of ETFs and offers more options for portfolio diversification.

Overcoming Barriers to Entry

Despite the growing popularity of ETFs, some advisors still face challenges in integrating them into their portfolios. Concerns around transaction costs, execution price, and liquidity remain prevalent among those hesitant to embrace ETFs. However, as actively managed ETFs gain traction and address these concerns, more advisors are likely to explore their benefits.

Conclusion

The retail channel’s increasing embrace of ETFs signals a shifting landscape in the investment industry. With the rise of model portfolios, actively managed ETFs, and a changing mindset among advisors, ETFs are poised to play a more significant role in client portfolios in the years to come. As barriers to adoption are addressed and awareness grows, ETFs are set to become a key investment tool for advisors seeking diversified and efficient options for their clients.