A growing number of financial advisors are embracing exchange traded funds, and this has helped to fuel substantial growth in ETF assets this year, according to Deborah Fuhr, global head of ETF research and implementation at Barclays Global Investors.

Fuhr embarked on a tour of Canadian cities in mid-October to meet with advisors across the country. In an interview on Thursday, she said she has witnessed a rising amount of interest in ETFs among advisors. This is partly being driven by a widespread shift towards fee-based advisory practices instead of commission-based sales in Canada, Fuhr said.

“Becoming fee-based advisors is something that I’m hearing is happening more and more from advisors throughout Canada,” she said.

As advisors move away from their reliance on commission, Fuhr said they tend to use a wider variety of products — including ETFs — in building portfolios for their clients.

“When you move to that, it really frees you up to look at the best products for your clients,” she said. In other markets where financial advice is already predominantly fee-based, such as the United States, Fuhr said advisors tend to utilize ETFs much more.

“A very significant amount of the registered investment advisors in the U.S. embrace ETFs, and have done so for a long time,” she said.

Now, Fuhr sees this trend emerging in Canada, which is helping drive rapid growth in the ETF industry. In fact, ETF assets in Canada grew at a significantly faster pace this year than in other countries around the world. In the first nine months of 2009, the ETF industry in Canada grew by 49% to $28.8 billion, according to BGI. This compares with growth of 25.3% in the global ETF industry.

Fuhr said advisors have an important role to play in working with clients on ETF investments, by helping them determine how the products could best fit into their portfolio. She said investors use ETFs for many different purposes, ranging from core equity holdings to vehicles for getting a small amount of exposure to a foreign market.

“You can still add value as an advisor by using these products,” she said.

On her Canadian tour, she has seen advisors showing active interest in educating themselves on ETFs. “There is a fundamental shift in the way people look at these products, and they’re looking at what is the value add that they provide as financial advisors.”

The rise of ETFs is also being driven by rising demand for simplified investment products in the aftermath of the financial crisis, according to Fuhr.

“Right now, we’re in a back-to-basic environment where people want simple products that are cost-efficient, transparent, liquid, and do what they say they’re going to do,” she said.

She added that since the bankruptcy of Lehman Brothers, investors are also seeking products without exposure to counterparty risk.

Fuhr also noted that investors are recognizing the benefits of ETFs over mutual funds, including lower fees and greater flexibility to buy and sell shares. In addition, she noted that active-versus-passive fund performance reports by Standard & Poor’s show that commonly, 60% to 70% of active managers fail to outperform their benchmark index.

IE