Advisors Turn To Sector ETFs To Add Diversification, Alpha To Client Portfolios

According to a survey of 419 financial advisors and wealth managers conducted by State Street Global Advisors (SSGA), the asset management business of State Street Corporation (NYSE:STT), the vast majority of investment professionals (85 percent) are using exchange traded funds (ETFs) to gain exposure to individual sectors or industries. More than one-quarter of survey respondents (26 percent) report that over 20 percent of their assets under management are allocated to sector/industry ETFs.

Advisors' top reasons for incorporating sector and industry ETFs into client portfolios include:
  • Portfolio Diversification (cited by 66% of respondents)
  • Expressing Tactical Views (65%)
  • Obtaining Alpha (49%)
  • Managing Risk in the Equity Market (42%)

"The lower for longer return environment has many investment professionals taking a more precise approach to asset allocation, which favors sectors and industries over style-based investing," said Nick Good, co-head of the Global SPDR business at State Street Global Advisors. "From 2000 to 2015, the average yearly difference between large cap growth and value is under 8 percent while the average difference between the best-and worst-performing sectors is 36 percent. Given this divergence, advisors are increasingly relying on sector and industry strategies to meet the needs of their clients."

Across all types of investment professionals, the use of sector and industry ETFs is most prevalent by private wealth managers, with 92 percent reporting they had some exposure to the sector and/or industry funds; followed by Independent/Regional Broker Dealer advisors (87 percent), National Broker Dealer advisors (86 percent) and Registered Investment Advisors (80 percent). The most important variables these investment professionals consider when choosing a specific sector or industry ETF are liquidity, expense ratio and the fund's holdings.

Looking ahead, 95 percent of financial advisors surveyed report they plan to increase (45 percent) or maintain (50 percent) their use of sector and industry ETFs in the future.

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