By Murray Coleman
–Evidence mounts that ETFs aren’t just trading tools
–More retirement funds, endowments adopting ETFs
–ETF advisers remain largely long term in focus
Since turning to exchange-traded funds to build investment portfolios for high-net-worth and institutional clients more than a decade ago, adviser Rob DeHollander says he has seen a stigma form around the industry.
Contrary to popular views that ETFs contributed to the “flash crash” in May 2010 and other high-frequency trading mishaps, a growing number of conservative investors managing endowments and large pension funds are turning to ETFs, notes the co-founder of DeHollander & Janse. The firm in Greenville, S.C., manages about $100 million in assets.
“There’s no doubt ETFs are popular with hedge funds and day traders,” Mr. DeHollander says. “But they’re also finding broader acceptance among institutional investors and wealth managers with longer-term investment strategies.”
How much is a source of rising industry debate. A recent Deutsche Bank study found that advisers with discretionary control over client portfolios and more than $100 million in assets in 2011 overwhelmingly accounted for the biggest chuck of ETF assets held by big, institutional-level investors.
Since 2010, Deutsche Bank says such portfolio managers running everything from mutual funds to separately managed accounts have stepped up their ETF purchases to command a slight majority of total industry assets.
At the same time, the firm’s analysts have estimated that what are known as retail investors–who are also believed to be largely long-term oriented–controlled slightly less than half of the total ETF marketplace at the end of last year.
Other studies reinforce such views. An annual survey of investment trends published by Cerulli Associates in the second quarter showed just 8% of financial advisers and related money managers built investment portfolios strictly around tactical strategies. By contrast, another 24% were using just strategic allocations and about 37% employed a more hybrid model–long-term core positions with a tactical overlay.
By taking a broad aggregative view of all types of investment plans, the Boston research group found advisers were allocating on average between 20% and 22% of their overall assets to shorter-term strategies.
“It’s probably fair to assume that advisers are generally much more long-term focused in their ETF allocation strategies,” says Alec Papazian, a Cerulli analyst.
Vanguard Group also has conducted an in-depth look at ETF use. In a report released last month, the funds giant studied millions of transactions in some of its most popular mutual funds and ETFs from 2007 through 2011.
Its managers were able to separate ETF investor activity from those of more-traditional mutual-fund buyers. Such a focus on “relative trading differences” suggests the findings can be interpreted “more broadly and universally” across the industry, says Joel Dickson, Vanguard’s senior ETF investment strategist.
The study found that 83% of all transactions tied to mutual funds tracked during the five-year period were long term in nature. Meanwhile, 62% of the firm’s deals in leading ETFs were categorized as stemming from strategic-allocation decisions.
“Our evidence suggests that we’re not seeing ETFs cause people to trade more frequently. Rather, what we’re finding is that people who trade more are choosing ETFs more frequently these days,” Mr. Dickson says.
Long-time ETF adopter Ron Vinder, an adviser at UBS Financial Services in New York, is also seeing more strategic use of such funds. But that transition is still likely in its early stages and will take years to evolve, he says.
Mr. Vinder notes his team, which runs $2.9 billion in assets, was warned initially by other portfolio managers that investors would drop him once they were introduced to the flexibility and low costs of ETFs.
“After deciding to take my practice in that direction, I didn’t have any clients tell me they were moving to invest for themselves using ETFs,” Mr. Vinder says.
Developing sound long-term asset-allocation plans and providing an objective voice of reason to keep investors disciplined through varying market cycles should be an adviser’s top priorities, he adds.
“ETFs fit perfectly into that type of strategic-investment process,” Mr. Vinder says.