ETFs cheaper, but not always less risky, argues Natixis

Jun 2nd, 2016 | By | Category: ETF and Index News


More than three-quarters of investors agree that index funds and exchange-traded funds are a cheaper way to invest, according to a survey from Natixis Global Asset Management. But with over 70% thinking ETFs are less risky, Natixis argues that their ability to reduce inherent market risks may be misplaced.

Natixis survey suggests investors require further ETF education

John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia.

The independent survey, commissioned by Natixis, of 750 individual investors in the US with a minimum of $200,000 in investable assets, found that 71% believe ETFs are less risky, while 64% of investors think using index funds will help minimize investment losses. In addition, 69% believe index funds offer better diversification and 61% think index funds provide access to the best investment opportunities in the market.

However, Natixis argues that while index funds and ETFs do provide a cost efficient means of accessing market exposures, a belief in their ability to reduce inherent market risks may be misplaced. According to a Natixis Portfolio Research and Consulting Group analysis, since 1928 investors in the S&P 500 Index have experienced a 10% correction more than once per year and a 5% decline more than three times per year on average.

“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blind-side investors during volatile markets.”

The survey also looked at investor attitudes towards asset allocations, finding that nearly two-thirds (65%) believe the traditional approach of an equities and bonds allocation is no longer the best way to pursue returns and manage investments. Furthermore, 70% of investors want new strategies that are less tied to broad markets and 75% favour strategies that can help them better diversify their portfolio, an approach that would seem to open the door to wider ownership of alternative investments.

That being said, just over half of investors (52%) surveyed actually owned alternative assets, a grouping that includes private equity, long-short funds, hedge funds and real estate. The leading reasons for avoiding ownership were a belief that the assets were too risky (56%), a lack of understanding about the assets (34%), and a belief they were unimportant to enhancing portfolio returns (28%).

“It is encouraging to see investors are looking beyond traditional asset classes to build portfolios designed to help them reach their financial goals through the widest range of potential market conditions,” said Hailer. “However, it is clear the financial industry still needs to provide more education to help investors make informed decisions.”

Lastly the survey sought to identify what investors believe are the most significant risks to financial markets over the next twelve months. A global economic slowdown was the most popular choice (identified by 41% of respondents), followed by a US recession (37%), the US presidential election (35%), interest rates (34%) and oil prices (31%).

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