Move Over Mutual Funds, All-ETF Portfolios Are on the Rise

Some investors love ETFs so much that they just can’t see themselves buying anything else.

About 62% of ETF investors can envision building an investment portfolio made up of just exchange-traded funds, according to a recent Schwab study, while 50% said they could be fully invested in ETFs within the next five years. As investors move into increasingly cheaper alternatives, the research highlights the diminishing role that mutual funds play in portfolios, as issuers introduce new strategies to keep up with advisor demand.

“From a time-sensitive point of view, you can buy an ETF at any time of day,” said Barry Martin, a portfolio manager at Shelton Capital Management. “There’s thematic ETFs, there’s growth ETFs. It seems like there’s more opportunities to specifically hit your clients’ needs in an ETF rather than a mutual fund.”

All In

The obvious appeal of all-ETF portfolios is that they will likely be cheaper than those constructed with mutual funds, despite the latter’s efforts to keep up. Another reason is investor life cycles: While investors nearing retirement age may want a more stable source of income, younger ones can generally take on more risk. These clients also have smaller amounts of investable assets and could initially opt for an ETF-only model portfolio. As they accumulate wealth, however, they might incorporate a separately managed account, Martin said. “The younger generation will be highly correlated with ETFs, but as they grow their account value, it’ll be broken down into other vehicles,” he added. “As someone progresses in life, they need to be more conservative, and with fixed-income products, that will naturally happen.”

There’s already evidence to suggest younger investors are more excited about ETFs than their pre-retiree counterparts. According to the Schwab study:

• Slightly less than half (49%) of newer ETF investors, defined as those who started investing in ETFs in the past five years, are millennials.
• Meanwhile, only 34% of “tenured” ETF investors, or those who started investing over five years ago, are millennials.

Choose Your Own (ETF) Adventure. An all-ETF portfolio also offers customization, and that’s driving traditional mutual fund firms to add ETF products, Martin said. His firm launched its first ETF in September. “It’s [in] the last three years that there’s been more of an awareness of using ETFs over mutual funds,” Martin said. “[ETFs’] popularity in the last few years, and inflows, show that.”