The underlying factor behind ETF recommendations

Clients may benefit from cost advantages, but advising firms look at something else

The underlying factor behind ETF recommendations
While there’s been much discussion about the cost advantages of ETFs, a new poll of US firms reveals one overlooked reason why they would choose a particular fund for their clients’ portfolios.

In TD Ameritrade International’s new 2018 RIA sentiment survey, 55% of respondents reported using ETFs more than mutual funds or stocks, while 27% said mutual-fund sales will fund new ETF purchases this year. The top reasons behind the use of ETFs in general were asset allocation (78%), lower costs (69%), and liquidity (60%).

But perhaps the most surprising finding comes from the ranking of factors that drive ETF selection. While tax advantages and lower costs are the most touted benefits for clients, the most significant influencer on independent advisors’ decisions was the quality or construction of the underlying index, with 38% citing it as a factor.

ETF performance was the next most important, noted by 23%, followed by total costs according to 14%. The other factors, in descending order, were:
  • Liquidity of the ETF (11%);
  • Expense ration (10%);
  • Tracking error (2%);
  • Brand (2%); and
  • Trading costs (1%)
The survey also revealed that most independent advisors will not buy or switch ETFs just because a certain provider announces a new offering. Instead, they said their decisions were driven by asset allocation needs and a preference for lower costs.

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