Rising ETF Adoption:

One Trend, Many Drivers

BY Rob Stel

New research shows that brokers’ growing use of Exchange Traded Funds is motivated by a range of strategies and perspectives.

Even without hard data about Canadian financial advisors’ use of Exchange Traded Funds (ETFs), it would be easy to get a sense that adoption of these products has been growing. In some parts of the industry, the question is not whether ETFs are gaining ground – it seems clear that they are – but what they’re displacing. Are brokers switching to ETFs primarily from more actively managed funds with higher fees?

To learn more about the current state of ETF usage among Canada’s independent brokers, Environics Research and the Canadian ETF Association (CETFA) partnered to survey over 300 leading Canadian IIROC (Investment Industry Regulatory Organization of Canada) brokers, engaging advisors from across the country with a representative range of dealers and practice sizes.

Key topics included where ETFs fit into brokers’ practices, how brokers expected to use them in the future, and how the ETF industry could better support them as their practices evolved. Not surprisingly, use of ETFs is widespread: 85% of brokers report at least some sales of these products over the past 12 months, although on average ETFs account for a relatively modest share of sales: 14%.

Most advisors report at least a moderate increase in adoption over the past year (56%), and a slightly larger majority expect their adoption to continue to grow over the next year (62%).

Fully three-quarters (76%) say they expect to increase their ETF usage over the next five years, with 24% saying they anticipate a ‘substantial’ increase.

As their adoption grows, advisors are taking advantage of the diversity of the ETF market, reporting that they’ve chosen products across a wide range of investment areas – from international equities to ESG assets to cryptocurrency.

In fact, one of the most striking findings from the survey is just how diverse advisors’ perceptions and motivations are when it comes to ETFs. The most common reason advisors cite for using them is to keep fees low, but that’s far from the whole story. Some see ETFs as a way to add efficiency to their practices, or to help clients access specific areas of the market, such as cryptocurrency or alternative products.

Since advisors see so many possible applications for ETFs – from broad-based cost control to highly targeted explorations – it’s perhaps not surprising that they also have a range of perspectives on which investors they’re most likely to connect with ETFs. Some brokers use ETFs as part of all clients’ investment mix. Others reserve them for fee-sensitive clients, for younger clients, or for clients with substantial assets.

Notably, advisors don’t seem to see the move toward ETFs as coming at the expense of mutual funds.

Our research indicates that advisors remain strongly committed both to mutual funds and to actively managed products. They see ETFs as one more tool in the toolbox: assets to be thoughtfully incorporated into portfolios as they craft optimal solutions for clients while maximizing the efficiency of their own practices.

As advisors deepen their involvement with an ETF market they see as both versatile and promising, they are also interested in learning more. Two-thirds express interest in sophisticated materials that offer guidance on how to incorporate ETFs into their clients’ portfolios in ways that complement other investments. A similar proportion say they would welcome educational materials to help them explain the benefits of ETFs to clients.

These findings paint an optimistic picture for the future of ETFs in Canada. Advisors themselves see the potential for increased adoption – and a large majority have already found ways to incorporate ETFs into their clients’ portfolios. Today, the industry has an opportunity to support advisors with high-quality materials to help advisors and investors alike benefit from the varied possibilities of these assets.

Read more about the survey and see more details about the findings described above in our summary report.

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