Advisers turn to ETFs for risk management

Financial advisers expect to see increased use of exchange-traded funds in client portfolios, while aversion to risk remains high, according to a recently released Invesco market study of US registered investment advisers (RIAs).

Invesco's Canadian subsidiary, Invesco Canada, offers 14 ETFs under the PowerShares Canada brand.

Advisers surveyed believe ETFs will make up 24 per cent of portfolio allocations over the next 12 months and 33 per cent over the next three years, representing a 10 per cent increase over results reported in Invesco's survey of advisers in 2011.

Against a lingering backdrop of global economic uncertainty, advisers still see clients remaining vigilant in their aversion to risk as 91 per cent believe their clients are more interested in minimising losses than maximising gains.

"This year's study continues to show how financial advisers are embracing the value of ETFs and the many ways they can be implemented in their clients' portfolios," says Michael Cooke, head of distribution, PowerShares Canada. "But even as many equity markets have shown signs of strength year to date, advisers are still indicating that risk management is a primary focus and they are looking to a variety of products, including alternative assets, to manage risk."

The survey also found a growing appetite for complex strategies, such as smart-beta ETFs, but broader adoption will require more education on how these strategies can best serve investors.

"ETF adoption rates in the US have tended to lead those in Canada by several years, suggesting that ETF usage can be expected to continue among Canadian advisers. But this growth in adoption will require education - an area where PowerShares Canada has become a leader," says Cooke.

With such issues as portfolio allocation and risk management in mind, Invesco partnered with Cogent Research to conduct its second blinded study to learn what is top of mind for advisers and their clients given current market conditions.

Advisers continue to blend active and passive funds in a single portfolio. Forty per cent of financial advisers agree that now more than ever they are creating portfolios using a blend of active investment vehicles and passive ETFs. Less than a quarter of advisers use an exclusively all active management portfolio (24 per cent) or an all ETF/passive management portfolio (19 per cent).

Risk management remains a priority. Consistent with the 2011 survey, advisers cite managing risk as a predominant philosophy in managing client assets (40 per cent). The survey showed wealth preservation as the most important issue for clients, followed by mitigating risk.

Risk management investment strategies have not changed. Advisers continue to mitigate risk in client portfolios by creating a blended asset allocation of active investments and passively managed ETFs (62 per cent) and applying a more conservative asset allocation (56 per cent).

Alternatives, emerging market equities and large-cap funds are drawing more attention. Within actively managed mutual funds, advisers are most likely to increase capital over the next 12 months in alternatives (46 per cent), emerging market equities (43 per cent) and US large-cap funds (40 per cent).