ETFs becoming investment vehicle of choice, says Charles Schwab

Oct 8th, 2015 | By | Category: ETF and Index News

Charles Schwab, a low-cost broker and ETF provider, has released the 2015 ETF Investor Study which explores investors’ opinions and attitudes on key trends within the exchange-traded fund industry.

ETFs becoming vehicle of choice for portfolio core, according to study

Heather Fischer, Vice President of ETF Platform Management at Schwab.

The findings point to a greater adoption of these products among every generation of investor and highlights an expectation for further growth in demand in the future.

The report, which was conducted as an online survey of more than 1,000 individual investors aged between 25-75, with a minimum of $25,000 in investable assets, found that these investors were assigning one-fifth (21%) of their portfolios to ETFs. This represents significant growth from a 16% allocation to ETFs that was recorded in 2012. These investors also expect greater usage of these funds in the future; ETF allocation is expected to increase to 25% by 2020, while one-third of investors (34%) plan to use ETFs as their core investment type within their portfolios in the future.

“In the five years we’ve conducted this survey, we’ve witnessed an evolution in how investors think about the role that ETFs play in their portfolios,” said Heather Fischer, Vice President of ETF Platform Management at Schwab. “More investors are viewing ETFs as the foundational component of a well-diversified investment portfolio, and we think that sentiment will continue to grow.”

The study highlighted that 64% of respondents were interested in core and specialised ETFs, an increase of eight percentage points since 2013. Moreover, 31% of investors planned to increase their ETF holdings in the upcoming year (65% of these wanted to increase existing ETF holdings while 57% wanted to add new ETFs), while only 3% foresee a reduction in ETF usage.

These trends are being facilitated by a greater acceptance of automated investing services, known as ‘robo-advisors’ which one-third (32%) of respondents were agreeable to trying in the future.

Consensus was fairly evenly split regarding the usefulness of active ETFs. Only 31% would consider an active ETF strategy within their portfolio while 33% favoured a ‘wait and see’ approach and 36% rejected their inclusion. Among the enthusiasts, 35% always preferred active to passive investing, 28% thought actively managed ETFs would add value under certain conditions, and 30% believed they complemented passive ETF strategies. Among the uninterested, 48% said the appeal of ETFs lie in their passive, low-cost structure, and 35% believed the products aren’t worth the additional costs.

Turning to the perceived benefits of the ETF structure, investors placed significant emphasis on lower costs. Commission-free ETF offerings were hugely popular with 41% of those surveyed while 28% would only invest in these products.

While reducing costs was a main focus, investors also valued characteristics such as transparency and choice. Two-thirds (66%) said it was extremely important to maintain transparent pricing with no hidden fees while 58% said it was critical to have access to the “right” selection of ETFs. Just under half (46%) felt it was vital that the broadest number of asset classes be offered by their brokerage firm.

“ETF investors recognize that while price is critically important, so too are factors such as transparency and choice,” notes Fischer. “Just like any other buying decision, a combination of price and quality is key. This year’s study shows that ETF investors are focused on both.”

Interestingly, although every generation of investor are embracing ETFs, as measured by increasing portfolio allocations and more favourable responses to future use of ETFs, notable differences emerged between the generations. Specifically, each generation held greater allocations to ETFs than the last and was more likely to recommend ETFs as a substitute for individual stocks and bonds or as a core portfolio allocation.

Millennials scored the highest in all regards with an average of a 41% allocation to ETFs within their portfolios. Furthermore, 70% foresee ETFs as the core investment type in future portfolios, 69% would consider using fixed income ETFs instead of individual bonds, and 77% would consider substituting stock-based ETFs in place of individual stocks.

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