Financial advisors continue buying ETFs for their clients in increasing numbers, according to a recent Fidelity survey that found gains largely coming from purchases of more expensive actively managed funds as opposed to passive funds that generally track an index
Purchases of active exchange-traded funds more than doubled among financial advisors since 2022, the Fidelity Institutional report on portfolio construction trends found. Based on over 3,000 professionally managed investment portfolios reviewed in the second quarter, the report states that 29% of advisors now have allocations to actively managed ETFs, up from 13% in 2022.
Among advisors using active ETFs, the average allocation is 17%, Fidelity’s analysis shows, with a particular focus on fixed income.
Active ETF Growth Driven by Fixed Income
Fidelity attributes the growing popularity of ETFs to advantages such as better tax efficiency, lower costs, and intraday liquidity compared to other investment vehicles. The report shows that 68% of incoming portfolios utilize both mutual funds and ETFs, while 74% of target portfolios include both vehicles.
Index funds remain the most popular product among advisors, especially for domestic equities, according to Fidelity’s data.
The average portfolio reviewed contains 13 holdings from 6 different asset managers, with underlying blended fees of 50 basis points, the report notes.
Fidelity’s analysis reveals that 24% of portfolios with large-cap exposure utilize only passive products, which could lead to unintended concentration in a handful of mega-cap stocks.
The report indicates that advisors have been reallocating from fixed income to equities to take on risk and participate in the market.
Fixed income allocations remained at 29%, the lowest in 2 years, according to Fidelity’s data.
While investment grade allocations were at a two-year high last quarter, they have dropped to 80% in the second quarter, the report shows.
In the equity space, the report revealed that the average equity sleeve of a portfolio was 68% in the second quarter.
Seventy-nine percent of the equity sleeve is allocated to U.S. equities versus 21% in international, Fidelity’s analysis shows.
Within U.S. equity, the average portfolio has 66% allocated to large-cap, 22% to mid-caps and 12% to small caps, which is largely unchanged from previous quarters, according to the report.
Fidelity’s data indicates that advisors continued to increase their allocation to sensitive sectors—including communication services and technology—along with growth allocation.
The report shows that growth allocations reached 42% of the equity sleeve, a high over the last two years, with 35% in core and 23% in value.
Fidelity notes that both a soft landing and recession are good scenarios to own bonds in, as the diversification provides protection in the event of slower than expected growth.
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