Why do advisors and investors continue to ramp up their ETF usage?

Factors include shift from mutual funds to tax-efficient ETFs and commission-free trading

Why do advisors and investors continue to ramp up their ETF usage?

A new report from independent research and consulting firm ETFGI shows the ETF market in the United States has attracted net inflows of more than US$343 billion year to date, the second highest on record. Last month alone, US$35.54 billion was brought in.

Deborah Fuhr, managing partner, founder, and owner of ETFGI, said ETFs are still growing in popularity among institutional investors, individual investors, and financial advisors in the United States, with each group finding distinct uses for them, reported ThinkAdvisor.

ETFGI said that in July, assets invested in the U.S. ETF sector, which includes exchange-traded funds and other exchange-traded products, climbed by 6.9% month over month to US$6.61 trillion. ETFGI also stated that the U.S. industry has 2,981 products from 251 providers on three exchanges.

Retail ETF adoption is being boosted, according to Fuhr, by platforms that let investors trade stocks and ETFs without paying a commission. That was a substantial adjustment.

Many retail investors find ETFs to be a practical vehicle for expressing their convictions on trends, topics, and other market areas to which they want exposure.

As investors wait for the COVID-19 pandemic to end and take on more risk, active ETFs have grown in popularity, according to Fuhr, who also pointed out that several large companies have recently entered the market with active ETFs.

In its inaugural ETF suite this year, Capital Group unveiled six active ETFs. Among other companies, she said J.P. Morgan Asset Management and Dimensional have been converting mutual funds into ETFs, which are typically more tax-efficient.

Three fifths of the ETFs introduced in the United States in 2021 would be actively managed, according to research by The Financial Times last year based on data from Morningstar Direct.

Fuhr emphasized the democratic aspect of ETFs, where everyone has access to the same investments, classifications, pricing, and fees.

When choosing ETFs, investors should conduct their research and avoid assuming that two products are the same just because they have a similar sound, according to Fuhr. She also emphasized the significance of comprehending the benchmark, the investment process, and the liquidity of the underlying securities.

The data showed significant inflows into fixed income ETFs in July, but equities ETF net inflows have outpaced fixed income so far this year.

Among the figures for July:

  • Net inflows into equity ETFs and ETPs totaled US$6.9 billion, bringing the YTD total to US$166.32 billion.
  • Fixed income ETFs and ETPs saw net inflows of US$26.87 billion, increasing the YTD total to US$92.9 billion.
  • Net inflows into actively traded ETFs and ETPs totaled US$4.39 billion, bringing the total for the year to US$57.36 billion.