By ETF Heat Map Team
Market participants are under the assumption that the demand in ETFs is driven primarily by young investors, namely millennials, who have a preference for self-directing investing. However, a whitepaper released by Pershing LLC in association with Beacon Strategies LLC discovered that the largest group of investors using ETFs are the Baby Boomers, ranging between 51 – 70 years of age, who work with their financial advisors to construct their portfolios. According to the survey, baby boomers make up 48% of the ETF users and are the least resistant group to the inclusion of ETFS in their portfolios.
The survey reports demographics of ETF users. The Baby Boomers (ages 51-70), the Greatest Generation (ages 71+), Generation X (ages 36-50), and Millennials (under age 36) represent 48%, 29%, 17%, and 6% of the investors in the ETF space. The Baby Boomers and the Greatest Generation are largely dependent on advisors.
What investors should keep in mind is that this study was conducted amongst investment advisors who primarily serve the older investor demographic. Therefore, the survey might be biased in their conclusion and thus the significance of younger Generation X and Millennial should not be discounted.
The report named The Evolving ETF: Advisor Use of Exchange-Traded Funds in Client Portfolios, conducted a survey of greater than 1500 advisors all over the world. It noted that more than two thirds of advisors (68 percent) who utilise ETFs have plans to dial up their usage of ETFS in the coming twelve months. Fifty-five percent of advisors reported that more than half of their existing client portfolios already contain ETFs.
The report discovered that ETF usage in portfolios is pivotal among the Greatest Generation and the Baby Boomer demographic groups as investors have become knowledgeable regarding the options available in the ETF asset class and the cost efficiency that the ETFs facilitate. 64% of advisors use ETFs as a core strategy in their client’s investment portfolios because they believe that ETFs will assist clients in accomplishing their financial objectives.
When it comes to choosing ETFs for a portfolio, the report found that “performance is most important (43 percent) and the provider’s brand recognition is least important (2 percent).” When it comes to ETF selection, the expense ratio, the bid-ask spread, and the investment strategy or investment sector were important 26%, 15%, and 14% of the time, respectively.
Justin Fay, a director for alternative investments and ETFs at Pershing, reported “ETFs can be a particularly attractive investment option for advisors, offering customizable solutions and potentially lower-cost access to markets, countries and sectors than many other comparable investment vehicles. While the registered investment advisor executives (RIA) channel continues to dominate in terms of ETF use, we are seeing increased adoption across other channels, particularly independent broker-dealers who are implementing ETFs more frequently within portfolios, and this trend is expected to continue.”
PricewaterhouseCoopers forecasts, “global ETF assets to reach $5 trillion by 2020, 6 up significantly from $3.07 trillion at the end of March 2016.” Given newer ETF products such as smart beta ETFs, Matthew Forester, chief investment officer for Lockwood Advisors suggests that, “They are a technological and legal evolution in packaging investment returns. Newer, quasi-active ETFs, sometimes called smart beta ETFs, challenge active managers to compete on performance, return to risk ratios or both.”
ETFs have become extremely attractive to investors due to the cost efficiencies, growing investor awareness about this asset class, ETFs ability to provide access to new markets, increased transparency of holds, and the readily available digital advice on ETFs. Investors, advisors, and portfolio managers should strongly consider investing in ETFs to enjoy the aforementioned benefits in addition to the diversification, leveraging, liquidity, and large range of investment strategies and opportunities that ETFs based on different financial instruments can provide investors.
Deborah Fuhr, co-founder and managing partner with London-based ETF research and consultancy firm ETFGI LLC, suggests that ETFs have risen to prominence given “Most allow for index exposures, as it is hard to find consistent, active, alpha managers”. “It’s hard to find active managers anywhere in the world that consistently outperform”.