The Annual ETF Investor Survey

[This article originally apppeared in our November issue of ETF Report.]

Our third annual ETF advisor survey comes at a pivotal time in the ETF industry. This year has seen a record number of launches so far, and total assets continue to grow. In this continuing atmosphere of expansion and development, we have polled our sophisticated readership to learn their opinions on the leading issues faced by financial advisors today.

We’ve again partnered with Brown Brothers Harriman—a leading provider of asset servicing for the global ETF market, with $308 billion in ETF assets under custody as of June 30, 2015—to update the survey to reflect the most relevant core topics and emerging new concerns, arriving at a questionnaire of more than 35 questions.

We’ve gathered the results, and the following is a summary of our findings. If you’re interested in learning more about the survey, send us and Brown Brothers Harriman a note at [email protected] with the words “ETF Report Survey” in the subject line.

Selection Criteria

When it comes to selecting an ETF, the exact exposure of the underlying index was the most important factor to consider, by a wide margin, at 46%. The closest runner-up was expense ratio, at 20%. Meanwhile, the factors deemed least important by respondents were historical performance and tax efficiency, selected by 28% and 29% of those polled, respectively.

Exposure was also the most important factor when considering a new ETF, claiming 51% of the No. 1 rankings via two categories—investment exposure and exact index exposure.

However, whether a new ETF is commission-free is a factor that is markedly unimportant to the respondents, as 44% selected it as the least or second-least important factor. This dovetails neatly with our query on how important commission-free trading is to participants when selecting ETFs.

Just over 77% said it had only moderate or no impact on their ETF trading decisions; the remainder said it was the most important factor or a significant factor in deciding on an ETF. Given how many trading platforms have launched commission-free programs, that’s a particularly interesting finding.

Liquidity and assets under management remain important to respondents. Nearly half of respondents say that 10,000 shares traded per day is sufficient liquidity for an ETF priced at $50 per share, while another 31% said they would like to see 100,000 shares traded. Another 8% said they wanted to see more than 1 million shares traded.

In terms of AUM, 35% said $50 million was the sufficient minimum, while another 37% preferred to see at least $100 million.

Actively Managed ETFs
Actively managed ETFs have been getting a lot of attention lately, mainly because, with a few glaring exceptions, they haven’t attracted a lot of AUM. However, with nontransparent active funds on the horizon, they’re getting more attention.

As it stands, a quarter of respondents said they didn’t invest in actively managed ETFs, but 26.5% said that performance history was the first thing they looked at, and another 26.5% said the reputation of the portfolio manager was what mattered most. Reputation of the offering firm, expense ratio and degree of transparency were each selected as the most important factor by roughly 6% of respondents.

With regard to asset classes, more than 29% said they would be most likely to buy an actively managed ETF if it covered fixed income. Another 26% said the same for emerging markets.

There’s a certain ambiguity around transparency. When asked if they would prefer an active fund that was overseen by a talented manager that either disclosed its holdings daily or disclosed them quarterly, 53% of respondents preferred daily disclosure over quarterly disclosure (47%).

Asset Class Concerns
We asked a series of questions that focused on important issues for different asset classes that are particularly relevant to the current market environment.

For example, we asked how much of a concern bond liquidity is for investors when it comes to fixed-income ETFs. If you’ll recall, the 2008-2009 financial crisis saw bond liquidity evaporate for a time. Only about 8% of respondents feel that the issue of liquidity is unimportant, while 11% consider it the most important concern. In the middle range, 81% consider it to be a “somewhat important” to “important’ concern.

When it comes to income, however, we asked investors to indicate the areas where they would look for it, allowing for multiple answers. A total of 74% of respondents said they would look for income from dividend-yielding stocks, with another 56% saying they would invest in REITs. MLPs and high-yield debt were each selected by 47% of respondents.

Finally, we asked a few questions about currency-hedged ETFs, which have proliferated recently, with more than 40 launching in the first three quarters of 2015 alone. Although many of those have failed to gather significant assets yet, nearly 46% of respondents said they had bought a currency-hedged ETF in the past 12 months, while 54% said they hadn’t. Although a few currency-hedged funds have been around for several years, the trend has really only started to take off, so that’s quite a foothold.

Nearly 36% said they were likely or very likely to purchase a currency-hedged fund in the next 12 months; 20% said definitively they would not be buying such a fund; and 46% responded with a lukewarm “maybe.”

While nearly 35% of respondents said none of their international exposure was currency hedged, the remainder of respondents had at least some currency-hedged international investments. The largest percentage of those respondents, 35%, said that up to a quarter of their international investments were currency-hedged.

It appears that a significant portion of the respondents are on the fence about currency-hedged ETFs, which indicates the trend has some runway left to it.

Smart Beta
If there’s a trend that has been building for some time though, it’s smart beta. Although the term covers a wide range of funds, factor-based ETFs have been where investors have been focused for the past several years, and the roster of such funds launched in 2015 rivals that of new currency-hedged funds.

Approximately 57% of respondents said they had bought a smart-beta ETF in the last 12 months, but 55% said that 5% of their portfolio or less was in smart-beta investments. Only 15% had more than 20% of their portfolios allocated to smart-beta strategies.

Most tellingly, only 1% of participants said they would reduce their smart-beta exposure over the next year, while 62% said they would maintain their current level of investment and 36% said they would increase their exposure.

While 31% of the respondents said they had not bought a smart-beta ETF, the largest portion of those who did—32%—said that they had used the smart-beta product to replace a plain-vanilla index fund. Another 13% said they had used it to replace an active fund.

Index Providers

With boutique index providers and customized benchmarks proliferating, there has been talk about the importance of the index provider decreasing. However, our results indicate index providers are still very important to ETF users.

Just 12% said the index provider was “very important” and more important than the ETF issuer. But another 32% said the index provider was just as important as the ETF issuer and 43% said the issuer was somewhat important and still mattered, despite being less important than the issuer. Just 13% said the index brand didn’t matter.

Most telling was the fact that the majority of respondents were willing to pay extra for a well-known brand name on their ETF’s underlying benchmark, to the tune of at least 10 basis points. When asked if they’d choose an ETF with a well-known index provider at 50 basis points over an ETF with a relatively unknown index provider at 40 basis points, 66% of respondents chose the more expensive ETF.

Issuers
Although the survey participants were decidedly ambivalent on the importance of ETF issuer when selecting an ETF (with just 12% deeming it the most important factor to consider), that doesn’t mean they don’t have opinions about the firms that provide the ETFs they use. Indeed, when selecting a new ETF, 20% of respondents said it was the most important factor to consider.

When participants were asked to choose the top issuers based on the strength of their brand and the quality of their ETFs, BlackRock’s iShares got the largest percentage of the vote, with 89% of respondents including it in their selection. Vanguard was the runner-up, chosen by 64% of the participants and State Street Global Advisors came in third, being selected by 53% of the participants.

The iShares salespeople were also deemed the most knowledgeable, by a wide margin, at nearly 34% of the vote, while First Trust—a much smaller shop—came in a distant second, selected by more than 14% of respondents.

When asked what sort of support they’d like from issuers, 9% of the participants said they didn’t need any help. But 64% said they’d like more product information, with 55% saying returns data and related information were important to them. Roughly half want educational pieces on different areas of the market.

Strategists
Finally, we asked about ETF strategists, another rising trend in the ETF industry. And here the waters are very murky. Although we’ve heard a lot about strategists this year, 76% of respondents indicated they managed client assets entirely on their own, while only 24% said they used a strategist to manage some or all of client assets.

Those are powerful numbers, but it remains to be seen if most participants are managing their clients’ assets in-house, because ETF strategists have not yet gotten the word out about what they do, or because of lack of interest. If the former, the ETF strategist space could have a significant runway, but if it’s the latter, the half-fledged trend will probably stall out.

Whatever the case, participants indicated that track record was the most important selection criteria, chosen by 51% of participants, while 41% ranked breadth of product offering as the least important factor to consider.

Conclusion
While 15% of participants have portfolios that are 91-100% composed of ETFs, fully half of the respondents have 50% or less of their portfolios allocated to ETFs. That means ETFs have a lot of room to grow yet.

If you're interested in learning more about the survey, send us and Brown Brothers Harriman a note at [email protected] with the words "ETF Report Survey" in the subject line.

Brown Brothers Harriman ("BBH") is not affiliated with ETF.com or its ETF Report publication.