The Australian ETF market recently surpassed A$120 billion in funds under management – a remarkable feat since the industry's humble beginnings some 20 years ago.

While it seems like ETFs have in the last few years rapidly become the investment product of choice for personal investors (young and old, new and seasoned alike), it would be remiss not to recognise the essential role financial advisers had – and still have – in driving their success in Australia.

Before ETFs became a trending topic on social media and before the rise of the 'finfluencer', financial advisers were amongst the first to appreciate the many benefits of ETFs and how they could be incorporated into a client portfolio to not only generate returns, but to diversify and stabilise.

According to the latest Vanguard/Adviser Ratings advice landscape report, ETFs are now the fourth most preferred investment solution for advisers, just behind direct shares and ahead of SMSFs, managed accounts and LICs.

So, why are ETFs so popular with advisers, and how are they being used to build and maintain client portfolios?

Low cost, broad exposure

The 2020 Investment Trends ETF report found that advisers' use of ETFs in client portfolios has quadrupled since 2008, with 80 per cent of advisers citing 'diversification' as their top reason for using ETFs, with 'competitive pricing' and 'brings down overall portfolio fees' as their second and third.

Interestingly, portfolio diversification became the top priority for advisers and their clients for the first time since 2018, trumping the usual focus on costs.

Spurred on by the pandemic and the resulting year of extreme volatility, advisers likely emphasised more than ever the need for clients to be broadly diversified across different industries, asset classes and regions to mitigate market risks.

To this end, index ETFs can be a one-stop investment shop for diversification needs.

Many ETFs combine hundreds of securities in just the one fund, providing exposure to entire markets and making them inherently diversified and relatively lower in risk than individual shares and bonds.

Targeted portfolio construction

On top of this, recent growth in the ETF space has allowed for more innovation and efficiencies of scale, translating pleasingly into a wider product offering, lower fees, and greater choice for advisers when constructing client portfolios.

Active ETFs and ESG ETFs, for example, are gaining popularity with advisers for their ability to help achieve more specific portfolio goals.

For clients seeking to achieve greater returns than the broad market or wanting to access a curation of securities by select fund managers, active ETFs allow for such investment preferences without the same high fees associated with actively managed funds.

ESG ETFs also offer clients the ability to invest according to their values without having to compromise on costs, accessibility or performance.

Effective and efficient

From an adviser's perspective, ETFs also save time. Instead of constructing a similar client portfolio using individual securities, advisers can mix and match “ready-made” ETFs to achieve their target exposure – be that active and index, domestic and international, or even particular themes.

A mix and match investment strategy many advisers have adopted is the core-satellite approach, where ETFs are used as the stable, core building blocks of a client portfolio, and individual securities or actively managed funds are used as satellites to complement.

Ultimately, ETFs are presenting a very efficient way to construct portfolios – allowing advisers greater capacity to spend on other important priorities, such as strengthening client relationships, developing new connections, and upskilling, rather than selecting individual securities and building diversification from scratch.