Costs still top reason for ETF use, but income increasingly an issue

UK professionals are increasingly drawn in by the cost efficiency, liquidity and income earning potential of ETFs and ETPs, a study commissioned by Source UK Services Limited finds.

Costs still top reason for ETF use, but income increasingly an issue


Nearly three quarters of the 150 UK-based IFAs and discretionary wealth managers who were polled identified long-term market exposure as the “key reason to use” exchange traded funds (ETFs) and other exchange traded products (ETPs).

Tactical portfolio adjustments, income generation and sector rotation were also considered primary reasons to invest in ETFs and ETPs, the survey’s findings revealed.

One of the primary reasons for this surge in popularity of ETFs and ETPs amongst UK has to do with their “inherent flexibility and adaptability,” Dominic Clabby, head of Source’s UK IFA division said. 

“More and more financial advisers and discretionary wealth managers in the UK are using ETPs and ETFs for client portfolios given the lower costs, better liquidity and powerful market exposure they provide,” said Clabby.

89% of survey respondents listed costs, followed by vanilla passive exposure (83%) as “the top reasons why they use ETP/ ETFs to meet their investment needs as opposed to other investment vehicles.”

Liquidity (81%) and better transparency (78%) were also cited as reasons to harness the powers of ETPs and ETFs, as was the ability to access hard to reach audiences (72%).

With many investors struggling to generate income in the current low interest rate environment, there has been a real opportunity for ETPs and ETFs to meet investor demand for sustainable income, said Clabby. “A new breed of income-focused smart beta ETPs are offering investors strong alternatives over traditional funds,” he said.  

This observation complements Source’s survey results, in which 40% of respondents said income generation was one of the key reasons to invest in the ETP/ETF vehicle.  

Source has similarly sought to capitalise on this income earning potential, recently launching three smart beta income ETFs which target “high-dividend-paying stocks that have been screened to favour sustainable income.”