Survey Finds Nearly Half of Advisors Don’t Do Monthly Reviews

Rydex Investments, the sponsor of leveraged ETFs and the CurrencyShares, exchange-traded products that track foreign currencies, released its Advisor Benchmarketing Supplemental Survey this week. Here are some highlights:

· Most of the advisors (55%) surveyed review the ETF universe and their clients’ ETF holdings monthly.

That may be the majority, but is a little more than half really most advisors? Is this a positive statistic? Well, let’s flip it around. Nearly half (45%) of all advisors DON’T review the ETF universe and their clients’ ETF holdings monthly. So, the odds are nearly 50/50 that your advisor isn’t on top of things. That’s not what I want to hear. Let’s hope your advisor isn’t one of them.

· Open-ended mutual funds and ETFs will be a primary vehicle or product focus for 2009 for investments, according to 98% and 83% of advisors respectively.

That agrees with what I’ve been saying for months. In fact, I think ETFs will surpass mutual funds in the cash inflows for 2009.

· When selecting ETFs for their clients’ portfolios, investment objective and index exposure are the most important criteria, according to 60% of advisors surveyed. The second and third most important decision making criteria are fees (45%) and benchmark tracking accuracy (35%), respectively. It’s interesting to note that more than a third of advisors (38%) do not find Morningstar rankings (or rankings from other research providers) important as decision criteria for ETF investment.

It makes sense that you have to decide what you want before you look at fees. I’m curious to know why so many advisors don’t use the Morningstar rankings.

· Most (80%) of the advisors surveyed said that they are knowledgeable on the differences between ETNs and ETFs, with almost all of them declaring themselves ‘very knowledgeable’ on the tax consequence differences between ETNs and ETFs (97%). Only about a third (30%) are knowledgeable on tracking error differences between the two.

Tracking error is the difference in return between an index fund and the index it follows. This typically results from the costs required to create and hold a portfolio of securities. Index funds should shoot for a tracking error of less than 10 basis points. Since ETNs don’t hold securities, they don’t incur any costs to create or hold a portfolio. They are merely a promise by the issuing bank to pay the return of the index. Thus, a well run ETN should have no tracking error.

· When advisors research different ETF choices, more than half (55%) use the Morningstar ETF center, 40% use the Yahoo! Finance ETF Center and about one third (34%) use ETF provider sites.

For my list of the best sites for researching ETFs check out How to Decide Which ETFs Are Best for You.

· Despite the current economic situation, ETF assets grew to more than $725 billion globally by the end of 2008, according to consulting firm Strategic Insight, and are expected to continue growing in assets over the next few years.

According to the Investment Company Institute, the trade group for the mutual fund and ETF industries, in 2008 U.S. mutual fund assets fell 20% year-over-year to $9.6 trillion, while U.S. ETF assets slid 12.7% to $531.3 billion. I will address the growth in ETF assets in another posting, but that attests to the growth of ETFs outside the U.S.

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