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Advisors drive increasing use of bond ETFs

To better understand how the financial advisor community is using bond exchange-traded funds (ETFs) in their practices and help advisors learn from their peers, Cerulli Associates conducted a survey of 378 financial advisors across the U.S.

The results of the study point to strong and growing use of bond ETFs within advisors' portfolios. The most experienced users have already adopted the vehicle at the core of their portfolios and many others are taking advantage of the potential benefits ETFs offer alongside managed products and individual bonds.

5 key findings about bond ETF use*

1. Secular trends of growth in advisory and fee compression support continued growth of ETFs

The growth of ETFs has been supported by broader secular trends, including heightened fee awareness, regulation, and the growth of the advisory business. Furthermore, the shift in investor preferences, including greater transparency, efficiency, and accessibility, has led to a rapid evolution within the advisory landscape. This is driving more advisors to consider lower-cost vehicles and put a greater emphasis on asset allocation using a wider range of vehicles, such as ETFs, to achieve client goals. This is driving more advisors to consider lower-cost vehicles and put a greater emphasis on asset allocation using a wider range of vehicles, such as ETFs. This should lead to the continued growth of ETFs.

2. Progression beyond equity ETFs

Bond ETFs are in the unique position of being used widely, but not deeply, by financial advisors. This owes in part to the legacy of the ETF—the first ETF products introduced to the market and used by advisors were equity products. Indeed, 87% of advisors report using bond ETFs and half plan to increase their use in the next three years. Survey results indicate advisors plan on decreasing their use of individual bonds and bond mutual fund in the next three years.

3. Bond ETFs offer different benefits than equity ETFs

While bond ETFs have many of the same potential benefits as equity ETFs, advisors aren’t as familiar with them. However, they do believe some specific characteristics relate more to bond ETFs than equity ETFs , such as diversification and ease of exposure.. About one third of advisors also say that the scalability of ETFs relative to individual bonds was a major reason why they began using bond ETFs.

Bond ETFs are largely used as a core holding today, but sophisticated users are using the vehicle as a way to tilt and diversify client bond portfolios.

4. Acknowledging preferences for active management and individual bonds

There remains a segment of advisors who prefer mutual funds and individual bonds. Some advisors cite active management and familiarity with the mutual fund structure as their primary reasons for using mutual funds. Other advisors cite control over client portfolios and defined maturities as a reason to use individual bonds. However, moderate and heavy users of ETFs are more likely to report plans to increase bond ETF usage, moving further away from individual bonds.

5. Bond ETF use from “experienced” bond ETF users

Cerulli found that advisors are most likely currently using bond ETFs as a relatively simple way to establish a bond core holding—25% "always" use bond ETFs for broad market exposure and other 21% use bond ETFs to diversify equities. Advisory practices managing more than $500 million or those that have a CIO are more likely than the advisor population as a whole to use more specialized application of bond ETFs: to always use bond ETFs to manage sector exposure, manage duration, manage maturities, or manage credit risk.