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Marc Zeitoun, Columbia Threadneedle

Columbia Threadneedle Investments’ financial adviser survey finds most intend to increase allocations to ETFs


Columbia Threadneedle Investments’ annual survey of close to 200 US-based financial advisers on their views on ETFs has revealed that most advisers intend to increase their ETF allocations to ETFs.

The survey found that some 91 per cent of those polled said they already sell ETFs to clients, and of the small percentage of advisers who don’t currently sell ETFs, 83 per cent said they’re likely to sell them to clients in the future. 

The market volatility experienced earlier this year is also having its effect with advisers looking more closely at their clients’ portfolios and considering changes to how they invest; nearly half said they would look to increase their allocation to active managers in the coming year, with about one-third plans to increase their allocation to strategic beta ETFs.

Columbia Threadneedle also observed a disconnect between expectations and familiarity. Three-quarters of advisers said they were very familiar with the portfolio managers on their active mutual funds, while less than half were familiar with their ETF portfolio managers. And only 38 per cent were as familiar with their strategic beta portfolio manager. 

The firm writes: “And here’s an even bigger disconnect: Despite most advisers saying they’re not very familiar with their ETF portfolio managers, in a separate question more than 80 per cent said they’re more likely to use ETFs from portfolio managers they know.” 

Marc Zeitoun, Head of Strategic Beta and Private Client Advisory, says: “I think this disconnect occurs most with passive strategies. To various degrees, most advisers perform a certain amount of due-diligence when evaluating active strategies – they consider the firm, look at portfolio manager tenure and study past performance metrics.  

“However, when it comes to passive investing, many advisers overlook this critical step. There is real value in understanding how fund assets are being managed and, in the case of passive exposures, who developed the index rules the fund is tracking.”

Liquidity and performance turned out to matter most when evaluating ETFs. Two-thirds of advisers who currently sell ETFs said they were very familiar with the underlying construction of their ETFs. The survey found that when advisers were choosing an ETF, they emphasised liquidity and performance as the most important attributes for advisers when evaluating ETFs — more important than price or portfolio manager.

Zeitoun says: “Generally speaking, I think advisers are becoming more familiar with the underlying construction of their ETFs, but there is room for improvement. One of the key features of passive investing is that it tracks rules-based indices that are well documented. 

“It is critical that more advisers take the time to examine their ETFs so they can better understand what they’re investing in. Remember, choosing an index without understanding its composition could very well lead to unintended investment consequences. I think many people were surprised about the recent changes to the Dow and, that it is in fact a price-weighted index.”

Another finding revealed that advisers are becoming increasingly confident in using strategic beta ETFs. More than half the advisors surveyed said they had at least some understanding of strategic beta, and 80 per cent reported some level of confidence with implementing strategic beta into a portfolio. Advisors younger than 45 were more likely to ‘know a lot’ about strategic beta, whereas advisors aged 55 and older seemed less confident.

The majority of advisers were frustrated with not being able to remove underperforming stocks from index investments.

Looking forward, Zeitoun says: “The ETF wrapper will continue to evolve beyond simple benchmark investing. The fact that only 22 per cent of respondents intended to increase their allocations to conventional benchmark indices over the next 12 months, reveals a ‘cooling’ towards those strategies. 

“We believe that there is a trend towards rebalancing back to alpha. Advisers have long understood the need to periodically rebalance portfolio exposures to asset classes, styles, and size; we think they should consider doing the same between beta (passive) and alpha. 

“The good news is that alpha can be accessed through a variety of product chassis, including strategic beta ETFs. Benchmark investing may be popular and cheap, but how the rules align with clients’ objectives and preferences is more important.”

Zeitoun concludes: “According to our recent survey, 64 per cent of advisers still expect their asset managers to infuse all their portfolios – even the passive ones – with their best thinking which is a comforting reminder that professional insights still matter to many.”

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