ETFs Lag Mutual Funds in Advisors’ Income Allocations

Advisors have increasingly been addressing clients’ cash-flow needs, favoring a curious vehicle that defies sales trends: Active mutual funds.

While cash and cash alternatives are the most commonly used (68%), active mutual funds are second (62%) and have increased in use by 9 percentage points over the past two years, according to survey data published this month by Nasdaq. Among more than 400 advisors who responded, the third most-used vehicle was passive ETFs (58%), followed by individual bonds (57%) and annuity contracts (55%). On average, advisors allocate 29% of assets under management to income-related investments.

“It’s become that ballast in a portfolio that advisors are looking for,” said Jillian DelSignore, head of retail and wealth distribution strategy in the index product management group at Nasdaq.

Actively Waiting

The fact that advisors use active mutual funds for income strategies more than passive and active ETFs shows that issuers can make up some ground, DelSignore said. While ETFs may not be the best fit in every category across income, they generally cost less than the retail and advisor share classes of mutual funds that are available outside of defined-contribution plans. “The active mutual fund uptick does really say advisors still value active management and precision in investing income — and perhaps there is an education gap on the value of an ETF,” she said.

When determining which vehicles to use in the income category, advisors told Nasdaq they turned to:

• Home office recommended lists (44%)
• Wholesaler recommendations (37%)
• Large RIAs that they follow (20%)

Dumptruck of New Products: Because the number of ETFs, particularly in niche categories like covered-call and buffered strategies, has exploded, advisors benefit from outside help to identify which products fit best for clients, DelSignore said. “Advisors are relying heavily on recommended lists, model portfolios and guidance from their issuer salespeople.”