Retail Investors: The Next ETF Frontier

November 18, 2010

According to Schwab, only 15 percent of retail investors own ETFs. How long until that grows?

Here’s something interesting that just crossed my desk: The new Charles Schwab ETF Snapshot for Q3 2010 for ETF data geeks, it’s a beautiful thing. It analyzes the holdings of three kinds of Schwab clients—retail investors, retail traders and financial advisers—to see how they use ETFs in their portfolios. The report differs from most ETF usage surveys, which are typically based on samplings of 1,000 or so advisers. The Schwab data is drawn from actual portfolio holdings across the entire Schwab asset base: millions of retail investors and more than 6,000 advisers.

It should be robust. Schwab says its clients hold about $100 billion in ETF assets, representing more than 10 percent of all ETF assets outstanding. That’s up 30 percent from 2009, and 14 percent higher than at the end of the second quarter. (IndexUniverse data shows that Schwab’s own ETFs had $1.74 billion in assets at the end of September.)

But the most interesting part of the data is how those assets break down. According to Schwab, its advisers own 51 percent of ETF assets at Schwab, while retail traders own 12 percent and retail investors own 37 percent. The retail investor number has grown the most, up 57 percent over the past year.

Despite the growth, only 15 percent of retail investors own ETFs at all. That compares with about 90 percent of Schwab customer who own individual stocks.

Those numbers should—and I think will—switch. The truth of the matter is that most individual investors have no business owning individual stocks as the core of their portfolios. It’s impossible to get truly diversified, and even harder to stay up on the research for more than a handful of securities. Even for short-term, tactical trades, most investors would do better replacing single stocks in their portfolios with ETFs.

I think they will. Despite the negative press spilling out from the Kauffman Foundation report, I think the average investor will ultimately be more comfortable making a call between India and China than they will between China Telecom and Infosys. As they do, the number of Schwab clients holding ETFs will jump to 35 percent, 50 percent or even higher. And the asset growth that represents will lift ETFs from $1 trillion to $2 trillion, $3 trillion or higher.

What would it take to get there? Education and time. Clearly some of Schwab’s customers are learning about the efficiency of holding ETFs. It’s impossible to tell from this brief snapshot where that know-how is coming from, but the word’s getting out.

There are other valuable stats included here, too, including:

  • Retail traders—those making multiple moves a year—are leaning heavily on leveraged/inverse funds, accounting for 66 percent of the flows. That’s perfect, as those products are designed solely for trading. Those traders are also “the only client group to demonstrate 12-month net negative flows,” according to the report.


  • Registered investment advisers and their clients are by far the most interested in U.S. and international fixed-income funds, accounting for 56 percent of that segment’s total flows. What’s odd is how little they’ve moved into U.S. equities, which have been performing well recently.


  • In spite of all the brouhaha about leveraged ETFs and commodities funds, standard retail clients and advisers are sticking to their knitting—buying products they recognize and know. Schwab doesn’t provide exact numbers, but it’s obvious from the chart that leveraged ETFs make up a smaller portion of overall retail investor flows over the past 12 months.


Schwab ETFs Snapshot

Charles Schwab & Co., Inc., November 2010


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