The use of exchange-traded funds by advisors and their clients has reached a new level—clients want more than simple growth from them. ETF.com just conducted its fourth annual survey of the ETF industry, and the survey reveals that clients are now demanding new ETFs that invest in alternative and fixed-income asset classes. They also want smart beta funds that seek to exploit inefficiencies in the market in order to achieve a higher return either strategically or tactically.

The survey surmises that the ETF market will continue to grow for the foreseeable future as it matures and offers a progressively wider menu of options to choose from. Read on for more about what investors are feeling about ETFs. (For related reading, see: Actively-Managed ETFs That Beat the Market.)

What Investors Want

The amount of money invested in ETFs worldwide is now about $3 trillion, $2.5 trillion of which is held in the U.S. ETF.com’s survey covered 175 different respondents, including broker-dealers, institutional investors and registered investment advisors. Ryan Sullivan, the vice president of U.S. ETF services at Brown Brothers Harriman & Co., told The Wall Street Journal that “for us, the trends and results here support the idea that investors are really seeking choices. [And] smart beta has become a middle option for investors seeking traditional passive and active strategies.”

Indeed, the demand for ETFs by clients clearly shows itself in the survey. The number of financial advisors who now invest at least 90% of clients’ money in ETFs has more than doubled, from 6% in 2013 to 15% in 2016. A third of respondents said that they use anywhere from six to 10 different ETFs in their portfolio on average, while a quarter of them use 11 to 20 ETFs. More than 10% use more than 20.

The use of smart beta funds is also continuing to grow, although this sector still lags the mainstream ETF market. Smart beta funds attempt to generate returns or reduce risk or volatility by investing according to various metrics other than market cap such as book value or dividends. The survey also reported that nearly 60% of respondents had purchased an ETF during the past year, which is a 10% increase from 2014. Just under 15% of respondents said that they were currently invested in a smart beta fund, which is a 5% increase over 2015. Two-thirds of the 60% who said that they had purchased an ETF during the past year said that they were replacing other investments with these funds, while the remaining third reported using new money. Virtually all of the respondents also responded that they were going to either maintain or increase their exposure to smart beta funds over the next year. And two-thirds of all respondents also voiced concerns about liquidity for their clients, which is a 4% increase over the year before. Sullivan said that advisors can combat this largely groundless fear by providing a higher level of education to investors.

Finally, the survey asked respondents what other types of fund choices they would like to see in the ETF universe. Four out of every 10 listed the respective types of funds that they would like to use, while a third of them responded that there are already too many funds in the ETF arena. More than 40% of respondents also said that they would like to see more actively-managed ETFs in the fixed-income arena, which is an 11% jump from 2015.

The Bottom Line

The ETF.com survey clearly reveals that clients are demanding greater usage of ETFs and are employing increasingly sophisticated strategies with them, often through the use of smart beta funds. Advisors will need to stay abreast of the latest developments in this arena in order to properly service their clients. (For related reading, see: Will Advisory Fees See More Downward Pressure?)

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