Financial advisors are increasingly embracing exchange traded funds, but they still have a long way to go, and product developers see a huge opportunity to further penetrate the market.

In a panel discussion hosted by the Toronto Stock Exchange on Tuesday, executives at Canadian ETF providers said ETFs have gained a huge amount of traction in the retail investing marketplace in the past few years.

“The industry has come a long way in a short period of time,” said Michael Cooke, head of distribution at PowerShares Canada. The growth is impressive considering the challenging market conditions, Cooke added. He said investors are drawn to ETFs as they becoming increasingly leery of the risks associated with investing in individual stocks in volatile markets.

Also contributing to the growth of ETFs is the utilization of the products by greater numbers of financial advisors.

“I think ETFs are emerging as a very efficient, low-cost, liquid tool to help advisors craft portfolios for their clients, whether it’s for buy-and-hold strategies or more tactical purposes,” Cooke said. “We feel that it’s a reliable product category that’s here to stay, and we’re just now spreading our roots at the retail advisor and individual investor level.”

The panelists said advisors are embracing ETFs partly because of the shift towards fee-based compensation, which prevents advisors from having to rely on products with embedded commissions.

“The industry is moving in a direction that’s helping ETFs,” said Marie Amilcar, vice president at iShares, the ETF provider owned by BlackRock Asset Management Canada Ltd.

Non-fee-based advisors are also exploring ETFs, particularly since advisor-series ETFs have been launched by such providers as Claymore Investments, Inc. and First Asset Capital Corp.’s XTF Capital ETFs. Similar to mutual funds, advisor-series ETFs pay advisors a trailer fee for selling the funds.

“If you’re a traditional broker that does not use a fee-based account as your vehicle, then you’re giving advice and you need to get paid for your advice, and so the advisor series actually fills that need,” said Barry Gordon, director, president and CEO of First Asset Investment Management. “It’s creating a level playing field, and just trying to encourage all advisors to look at ETFs.”

He said many advisors use ETFs as the core equity position of a client portfolio. Others use the vehicles to add exposure in a portfolio to very specific assets, such as emerging markets.

The panelists said they expect ETFs to continue to gain popularity among retail investors and advisors.

“The huge growth opportunity I think we all see is in the advisor marketplace,” said Gordon. He pointed out that in the United States, about 70% of discretionary, fee-based advisors are using ETFs, whereas in Canada, less than 30% of discretionary advisors use ETFs.

“We think there’s a long way still for ETFs to grow,” said Mark Raes, vice president and portfolio manager at BMO Exchange Traded Funds. “We’re just seeing the beginnings of it.”