What role can ETFs play in client portfolios?

Efficiencies around trading and liquidity make exchange traded funds an attractive prospect for investors, according to advocates of the structure.

It is 25 years since the first ETF was listed on the London Stock Exchange and the market has grown significantly in that time. 

The latest figures from ETFGI, the research provider, makes clear the growing popularity of the funds. 

It showed the ETF industry hit a record $17.85tn (£13tn) in assets under management as of the end of August 2025. 

Over the past 12 months, ETFs gathered $2tn in net inflows, with August marking the 75th consecutive month of positive flows. 

A report by the Investment Association, published in September, found current demand for ETFs is driven by younger, male and higher income investors. 

It found a lack of knowledge about ETFs was holding back the wider adoption of the products, with 49 per cent of the wider investor base having little or no knowledge of ETFs. A fifth of respondents to the IA who did not already own ETFs cited a perception of risk and complexity as a reason for not investing in the funds. 

However, the IA says ETFs “can actually reduce risk through diversification”. Investors are drawn to ETFs as they allow quick access to multiple investments and are cost-effective in enhancing diversification. 

Senior research analyst at AJ Bell Terry McGivern says liquidity is a key benefit to the products. 

He says compared to open-end investment companies (OEIC), which are traded once a day, ETFs have a constant price available throughout the day and can be traded as long as the market is open. 

“In terms of just visibility, transparency around pricing, you know, there’s big advantages straight away from the structure of ETFs.” 

Another aspect to consider with ETFs is the bid/offer or bid/ask spread. The bid price is the highest price a buyer is willing to pay for the ETF and the price at which you can sell it if you are the seller, while the ask price is the lowest price a seller is willing to sell the ETF and the price at which buyers can buy them. 

The spread is the difference between these two prices and represents the transaction cost of buying or selling an ETF. 

McGivern says the spread gives investors full transparency over transaction costs. He adds: “If you are a retail investor you are probably just transacting on the secondary market, on exchange, and there is a constant price available — it will trade throughout the day, as long as the market’s open that ETF can be traded. 

“You have got full visibility over your transaction costs straight away, in terms of spreads.

“The spread should capture the transaction costs for the investor, there should be nothing else over and above that, and you know what they are ahead of time before you click execute.”

Finn Houlihan, managing director of AAF Financial, says the advice firm broadly uses model portfolios to provide investment solutions for clients but notes ETFs have a role to play within this. 

He adds the relative low cost of ETFs is “absolutely fantastic” for clients.

Deborah Fuhr, founder of ETFGI, describes the ETFs as a “democratic investment product”.

She says: “I think there’s a number of things that are driving the global growth of ETFs.

“There’s growing investor adoption across the world and also across asset classes.

“If you look at ETFs they are the only, what I would call, democratic investment product being used by sovereign wealth funds, hedge funds, pension funds and financial advisers.” 

Tara O’Connor is senior reporter at FT Adviser