Advisors’ affinity for exchange traded funds and other index-based strategies is widely documented. That devotion is a big reason why, as of the end of July, US-listed exchange traded products had $11.81 trillion in combined assets under management.
That’s up from the prior record of $11.54 trillion set the month prior and higher by 14.1% on a year-to-date basis. Reaching levels like those confirms ETF adoption among advisors is strong across all advisor categories. Makes sense because passive solutions reduce the need to tinker with portfolios while potentially eliminating the desire to over-trade while freeing up advisors to focus on other pursuits.
Benefits to be sure and it’s clear more advisors are realizing those perks, but there’s a segment of the wealth management space that’s really leaning into ETFs/index funds: Power users. A recent whitepaper courtesy of Cerulli Associates explores the phenomenon of power users, a group defined as advisors that direct at least 75% of client assets to index-based products.
Seventy-five percent allocated to index-linked products may not be for all advisors, but for those not yet in the power user camp, there are reasons to at least examine what that stratosphere looks like.
Traits of Power Users
Citing the Cerulli research, S&P Dow Jones Indices highlighted some interesting points about power users. The majority are younger than 45 years old and work in independent or hybrid channels. Many like to build their own model portfolios. Notably, they serve wealthy clients.
“Nearly one-third have an average client size of USD 2 million or more in investable assets, and this group leans heavily on index-based strategies across asset classes, including U.S. large-cap equity, international equity and U.S. taxable fixed income,” notes S&P.
Another important point about power users is that they are ETF devotees. In fact, the percentage of ETF adoption among this cohort is well above what’s seen with the “average” advisor.
“Exchange-traded funds (ETFs) are power users’ preferred vehicle for passive strategies, which isn’t surprising given ETFs’ typical low cost, ease of use and tax efficiency characteristics,” adds S&P. “In fact, 92% of power users report a high use of the ETF vehicle to access index-based products, compared to 77% of all advisors surveyed by Cerulli.”
As highlighted in the Cerulli chart below, power users prioritize many of the same things when it comes to ETFs that other professionals and even retail investors do, including expense ratio and branding.
Power Users Scrutinize Indexes
As advisors, power users and otherwise, know, the bulk of equity and fixed income ETFs on the market today weight components by market capitalization – a methodology that taps into the collective wisdom of market participants. It’s also one that, at least in theory, doesn’t invite much evaluation or scrutiny of index construction, but power users are a different breed.
Power users are apt to dive deep into index issues, including holdings, rules and rebalancing schedules because they want to be able to clearly articulate to clients why their money is being directed to a specific fund. For clients, the good news is that power user advisors are willing to put in the work.
“These advisors are more inclined to use supporting educational content available on an index (69% versus 60% for all advisors) and consider the underlying index provider’s brand (64% versus 56%) to support their client conversations,” concludes S&P.