ETFs not displacing mutual funds from portfolios, study suggests

The race between the two investment vehicles may not be as much of a blowout as one would think

ETFs not displacing mutual funds from portfolios, study suggests

Given the continuous rise in inflows into ETFs and stories of outflows from mutual funds, one might think that the non-exchange-traded fund vehicle is on its way to extinction. But a new study suggests that advisors aren’t necessarily dropping one for the other.

The US-based Financial Planning Association (FPA) has released the 2018 Trends in Investing Survey, which was conducted by the Journal of Financial Planning and the FPA Research and Practice Institute. While 87% of participating advisors currently use or recommend ETFs with clients, 73% currently use or recommend non-wrap mutual funds.

“This is the widest gap between ETFs and mutual fund usage reported since ETFs overtook mutual funds in recommendation/ usage in 2015,” the report said.

But according to Michael Kitces, partner and director of wealth management at Pinnacle Advisory Group, that information ignores a broader historical context. Expanding the comparison to include other vehicles, he noted that the biggest shift for advisors has actually been from variable annuities — and, to a lesser degree, individual stocks and bonds — into ETFs. There’s also been a rise in the use of private-equity funds.

“In fact, mutual funds showed remarkably little decline in adoption rate over the past decade until just the past year,” Kitces wrote in a piece for Financial Planning. “In other words, ETF adoption rates have been rising dramatically even as mutual fund adoption has fallen only slightly.”

To the question “Which type of management style do you think provides the best overall investment performance?” the FPA found just 22% of advisors preferring a purely passive strategy, while only 12% thought active is best. The vast majority of respondents — including around 75% of ETF users — answered that they practice a blend of the two approaches.

“Stated more simply, advisors don’t appear to be abandoning mutual funds or active management entirely, just the active funds they no longer believe are adding value over a passive ETF alternative,” Kitces said.

He cited a corroborating data point from another report, the 2017 Erdos & Morgan Financial Advisor Media Outlook and Usage (FAMOUS) Study. Only 36% of participants in that study saw ETFs as an alternative to mutual funds, while the rest saw them as a complementary option to fill in certain areas where mutual funds aren’t perceived to add value.