Open-ended funds are still the vehicle of choice for the retirement planning community, as this month’s RP Inquiry found.
The exchange-traded fund (ETF) market is growing at a rapid pace thanks to the constant flow of new product launches, their widespread adoption by robo-advisers and a greater focus on costs.
Despite this, the uptake of ETFs in the UK lags behind countries such as the US and Germany, particularly among the adviser community.
Many advisers still favour active funds and tracker funds over passively managed ETFs, despite numerous studies showing active managers fail to deliver consistent outperformance after fees.
This month’s RP Inquiry asked readers how big a role ETFs play in their retirement planning recommendations to clients and why they are not using the products more often.
The survey found 38% of readers do not use ETFs at all and 43% said the products play a small part in their product recommendations. Only 14% said ETFs play a larger role than active funds, while 5% said it is generally a 50/50 split between ETFs and active funds (see Fig. 1, below).
Of those who said they do not use ETFs, one reader said ETFs are too high risk, while another said they would use the products if more defined contribution pension funds were made of ETFs.
One reader who answered that ETFs play a small role said it is challenging to provide due diligence and comparison reporting when using the products.
Another stated: “I use them sometimes in the accumulation phase – they are not preferred as part of a decumulation strategy.”
One adviser said the discretionary fund managers he uses often have a small proportion of their portfolio invested through ETFs, usually in the commodities sector.
Costs were one of the key reasons given by readers who said ETFs form a larger chunk of recommendations than active funds. One adviser stated: “Charges are so important and active funds are not really doing what they should be doing: performing.”
As well as costs, readers said ETFs can help with asset allocation during drawdown, while another said they offer good performance.
Fund structure
RP asked advisers what the reasons are for not using ETFs more often. More than a third (35%) said they prefer the active fund structure, 15% said ETFs are not suited to retirement planning, 10% stated that they do not understand ETFs and 40% cited other reasons (see Fig. 2, above).
One adviser said he would consider ETFs for the North America sector because the evidence suggests it is much more difficult for active managers to beat the index. “But for the rest of the world, it appears that the active managers do add value,” he added.
A recent report by S&P Global found that in the US, more than 99% of active funds have trailed their benchmark over the past 10 years.
Of the readers who answered “other”, one said he prefers to outsource investments but there are not any good multi-asset ETFs available.
Other reasons for not using ETFs more often include the need to avoid over-trading, risks and a preference for clean tracker funds. One reader stated: “I’m looking at ETFs as a replacement for managed funds, with the perception that I may be able to replicate the performance of a portfolio of managed funds with a portfolio of ETFs.”
Platform support
Another major reason why ETFs are not used more often by advisers is many platforms do not support them. Two thirds (67%) of readers said their platform supports ETFs, but 14% said it does not and 19% were unsure (see Fig. 3, above).
One adviser whose platform does not support ETFs said he is looking at alternatives – this could add pressure on platforms to ensure their technology can facilitate ETF portfolios.
Although the use of ETFs is far lower than active funds, advisers cited numerous benefits of the products. The main advantages cited were their low cost, ability to track many indices, transparency, ability to trade throughout the day and their diversified nature (see Fig. 4, below).
Other reasons given included the fact that there is little human input, which means there is a lower chance of mistakes occurring.
In addition, ETFs offer access to some niche investments and selected risk return exposures.
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