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An article on titled Why Financial Advisers prefer ETFs over Mutual funds by Robert Powell was brought to my attention this morning.

The article touches on the growing use of ETFs among advisers and the potential reasons driving that growth:

“What’s driving the increased use of ETFs among advisers? Three things: Lower costs (49%); tax efficiency (23%); and trading flexibility (14%).”

Blair duQesnay of ThirtyNorth Investments, a good friend of Aptus and rising star in the financial services world, was an adviser interviewed for the article.  She has a quote in the article worth expanding on – “…I think the next wave of ETF options will be new ways to diversify a portfolio or align the investor’s values with their investments,”

The ETF industry is known for low cost index exposure – look at the distribution and flow of Assets Under Management.  A shifting industry landscape is driving assets to lower cost options covering broad market exposure.  Don’t believe me?… iShares ETF IVV, which is designed to track the performance of the S&P 500, has brought in almost $17 billion year to date!   The magnitude of this shift has been steady and strong as ETF assets are booming.  These are the facts, but let’s get back to Blair’s quote, where she alludes to the future of the ETF industry…

The definition of ETF, believe it or not, does not equal “Low cost, index exposure”.  An ETF is an investment vehicle, just like a mutual fund or a closed end fund.  There are structural differences, no doubt, but at the core – it’s a tool to deliver efficient investment exposure to investors.  Yes, the structure of an ETF is a great way to deliver low cost index exposure, which should be a large portion of most portfolios, but it’s also a great vehicle to help advisers and their clients find better ways to, as Blair said,  “diversify a portfolio or align the investor’s values with their investments.”

Unique exposure to a certain area of stocks, a certain factor, a blend of factors, added risk management, and on and on and on.  The ETF industry continues to innovate to help advisers bring different and valuable tools to help clients meet their objectives.  Cheap broad market exposure is a great thing, but in an environment where valuations are elevated and yield is hard to find, something different might be useful.  Just a reminder…when the S&P 500 drops 10%, or 20%, or 30%, or more…that ETF that costs nothing and gives you exposure to the S&P 500 will too.

The best part for consumers is this – historically accessing unique exposure to bring value to portfolios has been expensive.  That’s changing.  More and more people are delivering these vehicles with an ETF structure that lowers costs, increases transparency, and dramatically improves tax efficiency.

The default definition of an ETF will gradually shift to include something other than “cheap index exposure”.  We are at the beginning stages, but Robert Powell is correct, Advisers will continue to prefer ETFs over Mutual Funds for most areas of a portfolio.