Investors need to know more about ETFs, and that’s because they want to use them more, Schwab says.
More than three-quarters of investors surveyed by Charles Schwab say that exchange-traded funds are here to stay, though the need for education persists, with nearly half saying they’re still ETF novices and just under 40 percent saying they know more about ETFs this year than last.
“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.”
That said, the 2012 ETF Investor Study by Charles Schwab clearly suggested investors will increase their usage of ETFs in the future. Since the first ETF came to market nearly 20 years ago, investors have been moving toward ETFs, largely because of low costs and tax efficiency. ETF assets are routinely reaching new records, most recently on Friday, Oct. 5, when they hit a fresh record of nearly $1.317 trillion.
The Schwab report is an online survey of more than 1,000 individual investors between the ages of 25-75 with at least $25,000 in investable assets and some familiarity with ETFs.
Schwab now has $7.71 billion in proprietary ETF assets, making it the 11th-largest U.S. firm.
The San Francisco-based company said 81 percent of the survey’s respondents say the future is bright for ETFs, while 45 percent call themselves ETF novices when it comes to understanding these products, and 39 percent claim they now know more about ETFs than they did a year ago.
Cost Hugely Important
Cost is the No. 1 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.
Investors surveyed say they pay most attention to expense ratios, followed by trading commissions.
Thirty-eight percent believe that the ability to trade ETFs commission-free is important, and of this group, 40 percent call it “most important,” while the remaining 60 percent say this ability is “very important.”
An additional 46 percent say commission-free trades are somewhat important, but not the only factor they consider.
Schwab offers commission-free trades on the ETFs to its clients.
Sector ETFs Popular
Forty-one percent 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, health care 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 percent want the ability to access ETFs through them, but only 12 percent said they can select ETFs through their employer’s retirement account now.
The Education Frontier
While 39 percent claim to be better versed in ETFs than they were last year, there are ample investors who still say they do not know enough to make that initial ETF investment.
Fifty-three percent 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 percent of those who own ETFs rate their understanding of the products at the intermediate level, a full 63 percent 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
The study also found that investors were most curious about increasing their understanding of sector ETFs, followed by fixed-income and equity ETFs.