Financial advisors with at least 10% of their client assets invested in exchange-traded funds (ETFs) report allocating 46% of total assets to index-based strategies. They expect that allocation to rise to 49% over the next two years.
Most financial advisors use ETFs to access index-based strategies, and, when selecting which index-based strategies, they commonly focus on index methodology. Index methodology is among the top five most important factors— trailing only expense ratio, performance, and brand of asset manager—for approximately 30% of financial advisors when selecting an index-based equity or fixed income ETF. When specifically asked about the most important considerations when reviewing an index for an index-based ETF, 82% of financial advisors agree that quality of index design and methodology is a top-three factor.
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Recent market trends have supported and paved the way for greater use of index-based products among financial advisors. The U.S. wealth management market continues to witness advisors and their firms adopt financial planning as their primary value proposition, replacing investment management as their differentiator. Simultaneously, there has been growth in the use of asset allocation model portfolios as an outsourced portfolio construction solution; many of these model portfolios leverage index-based products as building blocks.
Index providers deliver the underlying indices that these index-based products aim to track, maintain key benchmarks, provide the data used as an input in the construction of asset allocation model portfolios, and produce thought leadership and other educational content. Despite these important contributions, they are often underutilized by asset managers, wealth manager home offices, and financial advisors.
S&P Dow Jones Indices, MSCI, and FTSE Russell are the top index providers within the wealth management market. They boast strong brand awareness among advisors, are commonly used by financial advisors or by asset managers to build products popular with financial advisors, and maintain the largest market share of ETF and direct indexing separately managed account (SMA) assets tracking their indices. According to Morningstar Direct data, ETFs tracking indices from S&P Dow Jones Indices (33.8%), FTSE Russell (11.3%), and MSCI (9.5%) collectively account for more than half of total ETF assets.
Asset and wealth managers should look at index providers' other offerings in addition to the index data that they provide, such as consultation during the product development process, white label and customized index capabilities, improved ease of use and access to data, insight into areas of industry innovation, and thought leadership and educational content. Asset and wealth managers may also want to focus on index providers that are introducing new indices to meet evolving client needs and enhancing data offerings as asset allocation models become more prevalent.
As index-based product development ushers more strategies into the market, asset and wealth managers would benefit from brand awareness associated with index providers, as well as index providers' thought leadership and educational content. Index provider brand can aid in asset managers' and wealth managers' product positioning, while their thought leadership and educational material can act as an additional content engine that informs advisors and helps empower their client conversations.
Data is becoming more crucial to asset allocation model providers, especially as the model portfolio landscape becomes more saturated. Asset and wealth manager model providers should consider a variety of index provider data sources (e.g., index performance, attribution analyses, constituent data, updates on changes/rebalancing) across a breadth of asset classes (e.g., fixed income, international equity, alternatives) with flexible, easy-to-use delivery options.
