Exchange-traded funds are here to stay, according to 81 per cent of respondents to the 2012 ETF Investor Study by Charles Schwab, but the need for education persists.

Some 45 per cent still call themselves novices when it comes to understanding these products, and a smaller number (39 per cent) claim they now know more about ETFs than they did a year ago.

“It’s very exciting to see investors rally enthusiastically around ETFs as an essential part of their investing toolbox – but now we need to make sure that their knowledge about the use of ETFs fully matures as well,” says Beth Flynn, vice president of ETF platform management at Charles Schwab. “Most investors generally understand that ETFs tend to offer diversification at a low-cost, but many still need more insight and education on how best to use them, the risks involved and potential tax implications.”

The 2012 ETF Investor Study by Charles Schwab is an online survey of more than 1,000 individual investors between the ages of 25 and 75 with at least USD25,000 in investable assets and some familiarity with ETFs.

Investors in the study signalled that their usage of ETFs will broaden in the future. Forty one per cent plan to invest more in ETFs in the coming year, with sector and equity funds topping the list as the types of ETFs under consideration. Energy, healthcare and technology are the sector funds investors are most interested in buying.

Investor enthusiasm for ETFs carries through to retirement accounts. Of those surveyed who have an employer-sponsored retirement account, 55 per cent want the ability to access ETFs through them. Only 12 per cent said they can select ETFs through their employer’s retirement account now.

Cost is the number one factor investors look at when selecting ETFs, according to the study. Respondents also cited reputation of the fund sponsor and performance history of the ETF as the other two extremely important criteria they consider in making their investment decision.

When asked what matters most about ETF costs, investors surveyed said they pay most attention to expense ratios, followed by trade commissions. Thirty eight per cent believe that the ability to trade ETFs commission-free is important, and of this group, 40 per cent call it “most important” while the remaining 60 per cent say this ability is “very important”. An additional 46 per cent say commission-free trades are somewhat important, but not the only factor they consider.

While 39 per cent claim to be better versed in ETFs than they were last year, there are plenty of investors who still say they do not know enough to make that initial ETF investment. Fifty three per cent of investors who are considering but have not yet purchased an ETF claim that their lack of understanding is the main reason they have not done so. Although 57 per cent of those who own ETFs rate their understanding of the products at the intermediate level, a full 63 per cent of those considering ETFs classify their knowledge base as “novice”.

The five ETF issues that investors want to know more about are:

 • Tax implications of ETFs
 • How to best use ETFs
 • Risks associated with ETFs
 • How to best use sophisticated ETFs
 • ETF costs