Why ‘disappointed’ investors are turning to ETFs

The growing popularity of exchange traded funds (ETFs) makes it incumbent on investment advisers – big and small – to recognise the many benefits this type of vehicle can bring to their end clients and, ultimately, their businesses.

This is of particular relevance in the UK, given the requirements of the retail distribution review (RDR), which comes into force next year and places restrictions on how advisers are compensated by their clients.

Despite, or perhaps because of, the growth of the ETF industry, some industry participants and commentators maintain that ETFs are an unsuitable investment vehicle for retail investors.

While certain types of ETF structures – leveraged, for instance – are probably only suitable for the most sophisticated and experienced investors, to suggest that advisers and their clients should avoid ETFs is to ignore the many benefits of a vehicle that has revolutionised the way we invest. 

Leaps and bounds

While many active fund managers have seen their market shares decline, the ETF industry has continued to grow in leaps and bounds. In the US this year, ETFs have gathered $137 billion (£86 billion) in net new assets, while traditional mutual funds have attracted only $109 billion.

This is particularly impressive given the current level of assets under management – roughly $1.3 trillion for US ETFs versus $11.6 trillion for US mutual funds.

While the penetration rate is lower in Europe, the popularity of ETFs is still striking, with €13 billion in net new assets year to date versus €110 billion for traditional funds.

It should also be acknowledged that ETFs are not a new-fangled invention dreamt up by some finance whizzkid without a shred of common investment sense.

The first ETF – an S&P 500 Index fund that traded on the stock exchange in the US – was launched by State Street in 1993 and enabled institutional investors to equitise their frictional cash positions.