The ETF Industry’s Perception Issue

January 11, 2023

Exchange-traded funds aren’t a top-five choice among investors, according to a survey, due in part to lingering misconceptions and a lack of inroads into employer-sponsored retirement plans. 

A survey released this week by fintech SoFi Technologies Inc. found that 30% of retail investors surveyed opted to invest in ETFs. It was the No. 6 option after stocks, cryptocurrency, mutual funds, cash and bonds. The digital personal finance company surveyed 1,000 people about how they managed portfolios last year, and found 85% of them plan to make changes this year. 

Lack of experience and knowledge on how ETFs operate as an investment vehicle was the leading sentiment dictating investors’ preference for other products, SoFi’s Senior Manager of Financial Planning Brian Walsh said to ETF.com. They also are at a disadvantage to mutual funds, which are typically purchased through a company plan, he noted. 

“Most people start and continue investing through employer-sponsored retirement plans, which generally leverage mutual funds instead of ETFs,” Walsh said in an interview. ETFs also struggle against a misconception that actively managed funds performed better than passively managed funds—while most respondents mischaracterized only mutual funds to be actively managed and ETFs to be passively managed, he added.  

Misconceptions about how ETFs work is not an unfamiliar topic. “ETF” was the most looked-up financial jargon term on Google last year, averaging 103,000 searches per month, according to an October study conducted by research and trading firm CMC Markets.  

Because investors are more likely to place their money into products they are familiar with, a lack of knowledge about ETFs is most likely to impact their decision on what investment vehicle to opt for, according to Walsh. 

Compounding the issue is that investors are in a sour mood. Inflation and soaring interest rates, combined with war in Europe, made 2022 a difficult year for the economy, and the ETF industry was no stranger as fund launches dipped. 

The U.S. exchange-traded fund industry has grown rapidly over its three-decade history to more than $6.6 trillion in assets under management, according to ETF.com data. Still, new fund launches fell 9.6% in 2022, to 431. Furthermore, fund closures nearly doubled, rising to 145 from 79 in 2021. 

The survey found that mutual funds accounted for 41% of investments, surpassing ETFs and bonds, despite mutual fund to ETF conversions picking up speed in 2022, with over a dozen mutual funds transitioning into ETFs last year. Over $42 billion in ETF assets were from converted funds last year, according to data from CFRA. 

Room for Growth 

However, Walsh expects the percentage of ETF investments to increase over the course of the next year as continued volatility in the market will prompt investors to diversify their portfolios and not put in all their money in one product.  

“Diversification is one of those things that you don't really appreciate until you go through a volatile market,” Walsh said. “As new retail investors gain that knowledge and gain that experience, I think they’ll naturally gravitate to products like ETFs.” 

The survey also found that many respondents regretted some of their investments in 2022. ETFs, according to Walsh, are poised to benefit from this change in investor mindset. 

“I think ETFs are a powerful vehicle for average investors, especially as they start getting introduced to more and more employer retirement plans and people get more exposure to them,” Walsh noted. “I think they'll continue to be a bigger part of people's portfolios.” 

 

Contact Zoya Mirza at [email protected] 

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