SMAs' Popularity Beat ETFs Last Year, Survey Says
A larger percentage of U.S. investors owned separately managed accounts than exchange-traded funds in 2022, while mutual funds continued to lose market share, according to a report from Hearts & Wallets, an independent research firm.
Some 22% of the nearly 6,000 U.S. households surveyed held SMAs in 2022, compared with 18% who owned ETFs. That’s up from 13% and 16% in 2020, respectively.
The report included only the 77% of households surveyed that have at least $100 in investable assets and that knew what investment products they owned. It looked at only individual investors, not institutions.
The allocation for SMAs for those who own them rose from 18% in 2020 to 27% in 2022, while the average allocation to ETFs fell slightly from 18% to 16%.
Tax Advantages
SMAs and ETFs have tax advantages over mutual funds. The popularity of SMAs is partly because they offer investors a way to manage taxes. The accounts allow the ownership of individual securities, and so they enable more options for tax-loss harvesting, a strategy where investors sell securities at a loss to cut their tax bill.
“SMAs offer legal ownership of securities vs. indexing. And there are certain tax advantages, especially for higher-net-worth investors, with their ability to tax-loss harvest,” Laura Varas, CEO and founder of Hearts & Wallets, wrote in an email.
According to the survey, 16% of households with less than $100,000 in investable assets held SMAs, while 41% of households with $3 million or more did.
Mutual Funds in Decline
The study found that while mutual funds remain more common than either SMAs or ETFs, their dominance is waning. Some 38% of households held mutual funds in 2022, down from 39% in 2020. The average allocation from households that owned mutual funds fell from 38% in 2020 to 32% in 2022. These findings match a study by Morningstar that showed mutual funds hemorrhaged funds in 2022, while ETFs pulled in assets.
“Mutual funds seem to be losing their grip as the mass-market investment product of choice. ETFs are popular vehicles for investors. SMAs are growing in popularity.” Varas said.
Among institutional investors, the trend toward SMAs may be going the other way. According to a study by Cerulli Research reported in the Financial Times, 74% of U.S. asset managers saw ETFs as a big opportunity, versus 70% for SMAs for institutional clients.
Another possible reason for the large allocation to SMAs is the popularity of direct indexing during the period studied.
“The results of this survey are somewhat surprising and likely reflect the growth of direct or custom indexing, which was heavily marketed during this particular time frame,” Nate Geraci, president of The ETF Store, wrote in an email.
Geraci said he doesn’t believe the trend will continue, because it runs counter to broader investing trends.
“Those trends are a shift from active to passive management, higher to lower cost investments, and a move away from complexity towards simplicity,” he said.
Contact Gabe Alpert at gabriel.alpert@etf.com
