ETFs Gain Popularity With Retail Investors

Active traders in the U.S. remain confident the funds can generate returns.

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Reviewed by: Shubham Saharan
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Edited by: Shubham Saharan

Retail investors are turning to exchange-traded funds to navigate a volatile market still concerned about the Federal Reserve’s path to battle inflation, according to a recent survey.  

Almost half of all respondents stated that they currently hold ETFs in their portfolios, while 80% of all investors said they are at least somewhat knowledgeable about exchange-traded products, according to the latest Direxion Trader Sentiment Survey, which queried 500 active traders at the end of October.  

The results show retail investors are becoming increasingly accustomed to index funds, meaning financial advisors can offer a more sophisticated menu of passive products to advised clients.  

The newfound penchant for ETFs comes during a troubling time for equity and bond markets. Stocks slumped during the trading week as Federal Reserve Chair Jerome Powell signaled during an appearance in front of Congress that the central bank may raise rates higher than previously anticipated if the economy shows little chance of slowing.  

Treasury yields spiked on the announcement, as the policy-sensitive two-year Treasury note topped 5% on Tuesday for the first time since 2007. Meanwhile, the VIX volatility index hovered around 20%, slightly above its long-term average of 18.5%.  

Still, almost 90% of traders stated they could generate returns trading in both bull and bear markets, with 82% noting that they were “very or somewhat confident when making informed decisions about trading ETFs.”  

“It’s a positive sign that ETFs have become integral to so many active traders’ strategies, and that so many have done their homework to understand these investment vehicles," said Andy O’Rourke, Direxion’s chief marketing officer, in the survey.  

More than half of those surveyed also stated that technology firms would offer investment opportunities in the near future. Others highlighted sectors including health care and financials and banking, which the survey stated may offer “the most significant opportunity for returns over the next six months.”  

Technology ETFs have shed billions of dollars so far this year on disappointing fourth-quarter earnings from tech giants including Alphabet Inc. and more job cuts coming from Zoom Inc. and eBay Inc., with experts noting a slowdown on the horizon.  

The two largest technology ETFs, the Technology Select Sector SPDR Fund (XLK) and the Vanguard Information Technology ETF (VGT), have collectively lost $2.7 billion year to date, according to ETF.com data. The outflows come despite XLK and VGT both jumping 13.3% so far this year.  

 

Contact Shubham Saharan at [email protected]   

Shubham Saharan is a markets reporter at etf.com. Before joining the company, she reported for Bloomberg and the Financial Times. Saharan is a graduate of Barnard College of Columbia University.