It's clear, however, that ETFs are the investment vehicle of choice for a wide range of institutional and individual investors. Introduced 30 years ago, ETFs now manage roughly $4 trillion in assets globally — still less than the amount invested in open-end mutual funds (actively managed and indexed) — but most market observers expect assets in ETFs to surpass mutual funds within a few years, based on current investing trends.
"It's a cost and diversification story," said Jim Rowley, a senior strategist in Vanguard's Investment Strategy Group. "You can get extremely broad diversification at extremely low cost with ETFs."
The advantages of ETFs — low cost, tax efficiency, intraday trading and an increasingly broad selection of products — seemed to make less of an impression on fixed-income investors. The migration of assets from actively managed funds into passively managed ones has been far slower in the bond markets than in equities. It is happening, however, and appears to be picking up steam.
Last year passively managed bond ETFs took in $148 billion, compared to $46 billion for actively managed bond funds. This year both actively and passively managed bond funds are raking in assets, with inflows of $144 billion to passive and $118 billion to active through the end of August, according to research firm Morningstar.
The low cost of ETFs is looking all the more attractive, given the extremely low yields on investment-grade bonds in most developed countries.
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"People are shifting actively managed assets into passive vehicles across most markets," said Alex Bryan, a senior analyst with Morningstar. "The fixed-income market may be a little further behind the [equity] curve, but it's still following the same trend."
Fee-based financial advisors, early adopters of ETFs for equity exposure, also appear to be warming up to the funds for fixed-income investing. The most recent survey of more than 300 financial advisors by the Financial Planning Association found that ETFs were now the favorite investment vehicle of advisors, 88 percent, versus 80 percent for mutual funds.
Half of the respondents said they planned to increase their use of ETFs in the next year compared to just 20 percent who planned to use more mutual funds.
"I think there's still enormous room for growth in the use of ETFs by advisors," said Dave Yeske, managing director of registered investment advisory shop Yeske Buie.
Yeske, who is a certified financial planner, worked on the survey.
"ETFs are in everyone's toolkits now, and it's only a question of whether advisors will use them more. I think they will," he said.
While the survey didn't tease out numbers on the use of fixed income ETFs, Yeske says it stands to reason that advisors are using them more. For one thing, the proportion of advisors who said they invested in individual bonds fell to 52 percent, and only 16 percent said they planned to increase their investments in them in the coming year.
"Managing a bond portfolio is tough and the percentage of advisors doing it continues to fall," Yeske said.