More Advisors Set to Use ETFs in 529 College Savings Plans

ETF Trends

Exchange traded funds are joining mutual funds as holdings within 529 college savings plans. A majority of the growth has been based upon the interest of financial advisors.

“Advisers like them because ETFs give them very specialized investment options,” Andrea Feirstein of AKF Consulting said in a recent report. “And ETFs tend to be lower cost. So an adviser who puts an ETF into a client’s account is lowering the investment expense, which should give them better performance (than a mutual fund that invests the same way).” [What is an ETF? - Part 19: 529 Savings Plans]

According to AKF Consulting, there are currently 92 529 savings plans spread out over 50 states in the U.S. and District of Columbia. Of those, 15 offer ETFs, up from the 10 that offered them back in February 2012, reports Paul Katzeff for Investor’s Business Daily. [ETFs Gaining Traction with 529 Plan Providers]

The main driver of offering ETFs in 529 plans is financial advisors and about 31 current plans are sold through them.

ETFs are touted for the ability to trade throughout the day with the ease of a single stock. This trait, however, is not applicable to 529 plans because one of the guidelines to the plan is that trading can only happen once per year. The actual underlying investment still trades or re-balances regularly through the sponsor. [State Street Launches 529 Plan with ETFs]

Still, tax advantages are a huge part of owning a 529 savings plan. Any withdrawals used for college costs are tax-free and various states allow income tax deductions for contributions made, similar to retirement plans. [All-ETF 529 Plan Boasts 'Strong Cost-Benefit Profile]

Overall, investors can expect the proliferation of ETFs within 529 college savings plans to continue alongside the growth of the ETF industry. The ETF business has grown 144% over the past 5 years, and has about $1.5 trillion in assets.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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