Documenting the opinions of the world's leading ETF-focused financial advisors.
Here at IndexUniverse (parent company of ETF Report), we spend a lot of time talking to financial advisors about exchange-traded funds. We cover ETFs daily on IndexUniverse.com, gather nearly 1,300 people each year at our landmark Inside ETFs conference, and profile leading advisors in this magazine (the longest-running ETF news publication in the world).
But despite more than a decade covering this market, we've never taken the time to survey our readers. A few months ago, Brown Brothers Harriman—one of the leading ETF custodians and administrators, working on products with more than $170 billion in ETF assets—asked us: Why? Our readership includes the most sophisticated ETF-focused investors in the world. Why not gather their opinions?
The answer is that our readers are busy. We weren't sure they would take the time to answer detailed survey questions. Nonetheless, we liked the idea and figured it was worth a shot, so we sent out two ambitious surveys, totaling more than 40 questions. To our surprise, more than 1,000 responses came back. People wanted to be heard!
What follows is a summary of our findings. If you're interested in learning more about the survey, send us and BBH a note at [email protected] with the words "ETF Report Survey" in the subject line.
DOES THE INDEX MATTER?
A huge debate rages in the ETF and index fund community around the value of the index. A decade ago, there were major differences in the way various market-cap-weighted indexes were constructed: Some used free float, some didn't; some ignored small-cap stocks, others didn't.
But since then, the differences between indexes have been shrinking. This came to a head in 2012, when Vanguard announced plans to replace many of the MSCI indexes underlying its ETFs and index funds with indexes from FTSE and the Center for Research in Security Prices. Vanguard cited costs and cost-certainty as the drivers of that change. Vanguard's bet was that its brand was more important than the specific index.
Was it a smart move? We asked our users:
Interestingly, slightly more than half of all users said that the index was of equal or greater importance than the brand of the ETF issuer. At the other end, 13.5% of users said the index didn't matter "at all."
We wanted to probe deeper. Many fund companies are considering "self-indexing" their products to reduce costs; others are turning to upstart, niche index providers to serve up benchmarks. Are investors willing to bet on these fledgling indexers? Or do they want the confidence and track record that come with a blue chip provider?
We asked a hypothetical:
Suppose you have two ETFs that both focus on emerging markets. One ETF tracks an index from a major index provider like MSCI/S&P/FTSE and charges 0.50%; another tracks an index from a company you've never heard of and charges 0.40%. They offer similar exposure, and are issued by the same ETF sponsor. Which would you buy?
Two-thirds said they would buy the more expensive ETF linked to the major index.
We wanted more details, so we asked:
The CFAs among you will notice that the two results don't add up; at a maximum, 53% of the answers to the second question allowed for a 0.10% premium for the index. How could two-thirds of our readers answer the original question saying they'd gladly pay 0.10%?
The answer, we think, comes down to transparency. When the index price is bundled into the overall expense ratio (as it was in the first question), investors don't think twice. But when you itemize the fee, all of a sudden the willingness to pay goes down.
One last note on indexes: When asked in which asset classes do indexes matter most, the overwhelming choice was "equity." Fixed income registered second, followed by commodities, alternatives and multi-asset portfolios. The results are curious given the homogeneity of equity-index portfolios, and the heterogeneity of indexes in other asset classes.
Our guess? Readers know the most about equity indexes; they're less familiar with other markets, and therefore less familiar with the differences.
HOW DO ADVISORS SELECT ETFs?
Our next series of questions focused on how investors choose ETFs. With the media's laser focus on expense ratios and tracking error, are those the primary elements investors look for when choosing a fund? We asked:
We're happy to say that our readers keep their eyes on the big picture: "ETF Strategy/Exposure" got the most first-place votes by far (58.5% of all votes).
Interestingly, investors had very mixed opinions about the value of the ETF issuer, with nearly as many rating it "most important" as rating it "least important." By contrast, virtually everyone agreed that exposure and expenses were critical factors: 85% of investors cited exposure as one of the top three factors, while 75% said expenses ranked among the top three. Trading spreads were roundly panned: Just 2% of investors surveyed said spreads were the most important factor to consider, while 43% said they were the least important.
Ambivalence about trading spreads did not extend to all trading costs. We asked our readers:
Fully 25% said that commission-free trading lists had either an "Enormous" or "Significant" impact on what ETFs they choose.
And ETF brand? We asked:
It seems that familiarity breeds contentment in the ETF space: The five top scores came from the five largest ETF providers. Only Pimco broke ranks: It is currently the 11th-largest ETF issuer, but netted 6th place on our survey.
ACTIVE ETFs & MUTUAL FUNDS
Actively managed ETFs have been "the next big thing" for better than a decade. They've gained some success—there is currently $14.44 billion in actively managed ETFs—but the vast majority of that is in fixed-income ETFs.
Why? Currently, actively managed ETFs must be fully transparent, disclosing their full portfolios at the end of each day. While fixed-income investors don't seem to care, and major managers like Pimco's Bill Gross have entered the space, equity managers do care. And while there are moves afoot at the SEC to allow for nontransparent ETFs, the likelihood of passage in the near term is small.
Our survey suggests that active managers should just get on with it. We asked the following:
Hear that, Contrafund? Investors want access in an ETF wrapper, and the majority thinks that outweighs front-running concerns.
MARKET OUTLOOK: PRO EQUITIES
Our readers are among the most sophisticated, asset-allocation- focused investors in the world, so we wanted to hear how they were tweaking their portfolios for the year to come. The answer? Mostly no change. That's not surprising: Our readers skew toward passive investing.
But a significant portion were planning changes, and those changes were going in one direction—toward equities. We asked:
It's not a great rotation, but a gentle one, to borrow the phrase from Deutsche Bank.
WHAT'S COMING NEXT?
Last but not least, in our second survey, we asked our readers their thoughts on new ETFs. Many new ETFs are having difficulty attracting investors, and we wanted to learn why. We asked:
To our mind, the fact that more than half of our readers will consider buying a new ETF within three months of its launch suggests plenty of appetite for new product.
Seasoning time isn't the only factor to consider, of course; most investors look at volume and assets. So we asked:
Here again, we were impressed: Nearly 25% of our readers said they would buy an ETF with $10 million or less in assets, and more than half would consider it with just $50 million in assets. That's well below the $100 million figure most of the media throws around.
To dig deeper, we asked:
The classic answer here is "100,000 shares." But our survey showed that more than 60% of investors would consider an ETF with just 10,000 shares traded. Perhaps our readers are more familiar than most with the concept that the true liquidity of an ETF is not what you see on the screen, but what you see in the underlying securities that ETF holds.
Finally, we were interested in investors' reaction to some of the more cutting-edge strategies out there, so we asked:
The numbers were startling. At the time, assets in those strategies were quite low; collectively, they made up just 4.5% of overall equity AUM. But 31-47% said they were considering those approaches.
Did they mean it? As of July 24, assets in funds linked to those strategies had grown by 66% over the 12-month period to $69.2 billion, collectively.
We think it's probably just getting started.
Perhaps the most interesting takeaway from our survey was the fact that our readers use a diverse array of tools to get exposure to different markets. When asked, for instance, what percentage of your total client assets' equity exposure is obtained by ETFs, the responses were all over the map. Of those who manage assets directly, the breakdown was:
Similar trends were seen in fixed income and commodities.
There's plenty more in the survey, but those are some of the highlights. Again, reach out to us at [email protected] if you're interested in learning more.
Brown Brothers Harriman ("BBH") is not affiliated with IndexUniverse LLC or its ETF Report publication.