Investors keen to learn more about ETFs, says Schwab
Even with a perceived proliferation of exchange-traded funds in the market today, two-thirds of investors say there is room for more, according to a study by Charles Schwab.
Among them, nearly 60 per cent say more ETFs will lead to increased competition and lower prices, and that continued product innovation is necessary to keep up with a changing market and economy.
More than a quarter (28 per cent) say that more product choice is the industry trend that has most benefited investors in the past few years.
The 2014 ETF Investor Study by Charles Schwab is the fourth instalment of an annual online survey of more than 1,000 individual investors between the ages of 25 and 75 with at least USD25,000 in investable assets who have purchased ETFs in the past two years or are considering doing so in the near term.
The study found that seven out of ten investors say they are confident in their ability to choose an ETF that is right for their investment objectives. Yet, even as investors are embracing choice, a surprising 38 per cent of investors say they want a better understanding of how to choose an ETF. Thirty nine per cent would like to better understand how to best use ETFs in their portfolio.
“It’s clear that investors expect innovation and choice when it comes to ETFs, but that enthusiasm is coupled with a desire for a deeper understanding of how to choose and use the products,” says Heather Fischer, vice president of ETF platform management at Charles Schwab. “Although 40 per cent of investors still consider themselves ETF novices, that group has been steadily shrinking and is down from 45 per cent in 2013. What this means is that education remains a top priority but as ETF investors are becoming increasingly savvy, they are seeking products, strategies and access that go beyond the basics.”
ETFs make up an average of 18 per cent of portfolios among those who own them. One in five owners says that ETFs account for 25 per cent or more of their total investments, up from 16 per cent who said the same thing in 2011.
Investors use ETFs to accomplish a variety of investment goals. Forty four per cent primarily use ETFs for core or long-term holdings, while 22 per cent use them for tactical or short-term investments. And 34 per cent of investors like ETFs for both long- and short-term holdings.
When asked to imagine their investment portfolio as a dinner menu:
• 57 per cent of investors compare ETFs to a side dish
• 30 per cent of investors look at ETFs as an optional dessert
• 13 per cent view them as the main entrée
While the majority of investors see ETFs as a side dish now, there is evidence that the portion is growing, and more are likely to see it as an entrée in coming years. Half of all investors expect that their portfolio will have a higher proportion of ETFs in the next five years.
When it comes time to buy ETFs, funding will come from cash: 44 per cent will tap existing cash from money market or other accounts, and 40 per cent will invest with new cash.
As investors gain a deeper understanding of ETFs their confidence grows. The most confident ETF investors– the 16 per cent of all investors who say they are extremely confident in their ability to choose an ETF – see ETFs playing a more significant role in their portfolio:
• 38 per cent view ETFs as the main entrée of their investment portfolios
• 63 per cent expect to increase their ETF investments in the next year, compared to 46 per cent of all investors
Forty per cent of investors say they know more about ETFs today than they did last year. Sizable numbers of investors say they “have a good understanding” of many ETF basics, such as how they differ from other products (45 per cent), the benefits and risks of investing in them (37 per cent and 36 per cent), and how to use ETFs for targeted exposure to certain asset classes (34 per cent). The study shows that investors are looking for what is next and want education to advance their understanding of ETFs.
This year’s study reveals that 39 per cent of investors are curious to learn more about ‘smart beta’ products that use fundamentally weighted indexes, low volatility or equal weight strategies, among others. Of that group, three quarters want a better understanding of the differences between smart beta strategies and nearly eight in ten want to know how to best use them in their portfolios. Nearly a third of investors are interested in learning more about exchange-traded notes and commodities ETFs.
Investors are also interested in new ways to access ETFs. Three out of five want ETFs in 401(k) plans. The most attractive benefit, according to these investors, would be the ability to invest in market segments that are more accessible than mutual funds (37 per cent). The appealing low cost of ETFs (24 per cent) and their intra-day tradability (24 per cent) followed. One in five respondents predicts that increased availability of ETFs in 401(k)s will be the most positive ETF trend for investors in the next several years.
“ETF investors welcome innovation and as they look ahead they believe that better education, more products and choices and the availability of ETFs in 401(k) plans will be one of the most critical developments for ETF investors over the next several years,” says Fischer. “The future of ETFs certainly appears bright, but as an industry it is our responsibility to keep the flame alive with the right education and resources so investors can keep pace.”
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