Exchange-traded funds (ETFs) remain the top investment choice among financial advisors and their popularity shows no signs of slowing down in 2017, according to research conducted by the Financial Planning Association (FPA), the Journal of Financial Planning and Longboard Asset Management. The 2017 Trends in Investing Survey, which queried 302 financial advisors in March and April, also found that cash was the second most popular investment vehicle.

Eighty-eight percent of financial advisors currently use or recommend ETFs for client portfolios. ETFs have also more than doubled in popularity among financial advisors since the 2006 survey, when only 40% of advisors recommended them. (For more, see: Why ETFs Are So Popular with Financial Advisors.)

Fifty percent of advisors surveyed anticipate increasing their ETF recommendations over the next 12 months. This trend dovetails with the public’s cry for reduced fee products as most ETFs have lower fees than similar mutual funds. Advisors also appreciate the greater tax efficiency that ETFs offer over mutual funds.

Cash Is King

For the first time since 2006, cash and cash equivalents are second only to ETFs as the most recommended investment vehicle, with 85% of respondents recommending cash for their client portfolios. By comparison, in 2006 only 53% of advisors recommended cash. This is also the first time since the first survey was conducted that cash and equivalents (85%) is being used and recommended more than mutual funds (80%). Over the next 12 months, 16% of advisors also expect to increase cash holdings within client portfolios.

In the eighth year of the bull market, advisors might be somewhat cautious. Additionally, market valuations are currently at an historically elevated level. This might explain the trend towards increasing cash holdings as cash can temper stocks' volatility.

More Advisor Preferences

The following chart shows which investment vehicles advisors expect to increase their use/recommendation of during the next 12 months.

Investment Vehicle

2016

2017

Exchange-traded funds (ETFs)

46%

50%

None. I do not plan to increase the use/recommendation of any investment vehicles

26%

25%

Mutual funds (non-wrap)

19%

20%

Individual stocks

23%

19%

Individual bonds

18%

16%

Cash and equivalents

15%

16%

Mutual fund wrap programs

21%

15%

Fixed annuities (immediate or deferred)

12%

10%

Fixed permanent life insurance products

10%

9%

Other alternatives (bought directly, not included in other investment vehicles)

9%

8%

Individually-traded REITs (not held in mutual fund)

5%

6%

Variable annuities (immediate or deferred)

9%

5%

Indexed annuities

9%

5%

Private equity funds

4%

4%

Non-traded REITs

4%

2%

Hedge funds (directly, not through mutual funds)

2%

2%

Variable permanent life insurance

4%

1%

Options

3%

1%

Other

1%

1%

Source: Trends in Investing 2017

Advisors are most likely to boost allocations to ETFs, mutual funds, individual stocks, bonds and cash equivalents this year. The assets at the bottom of the list - indexed annuities, private equity funds, non-traded REITs, hedge funds and options - are in more esoteric, higher fee categories. (For more, see: ETFs Can be Tax Efficient: Here’s How.)

Other notable findings focus on diversification and asset allocation:

  • Sixty percent of advisors use the same suite of investment vehicles regardless of market conditions.
  • Forty-seven percent are looking for new ways to diversify portfolios.
  • Fifty percent are either very confident, confident or somewhat confident in the ability of the traditional 60/40 stocks versus bonds portfolio to provide returns in line with historical returns. The other half are less certain about the best diversification allocation going forward.

The Bottom Line

The popularity of ETFs among financial advisors continues to grow. Cash and cash equivalents, meanwhile, is now being recommended more than mutual funds. Finally, uncertainty about future tax changes and inflation is creating additional portfolio management concerns. (For more, see: The Most Popular ETFs with Financial Advisors.)