ETFs in Excess? Not True, Say Investors

New Schwab study finds that investors are embracing innovation and choice but still have an appetite to learn more about ETFs

Thursday, June 26, 2014 5:00 am PDT

Dateline:

SAN FRANCISCO

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NYSE:
SCHW
"The future of ETFs certainly appears bright, but as an industry it is our responsibility to keep the flame alive with the right education and resources so investors can keep pace."

SAN FRANCISCO--(BUSINESS WIRE)--Charles Schwab:

  • 66% of investors say there is room for more ETFs on the market today
  • 71% are confident in their ability to pick an ETF that’s right for them, yet nearly 40% still want a better understanding of how to choose and use the products
  • Investors’ understanding of ETFs is improving: 40% of investors say they know more now than a year ago
  • 40% of investors today consider themselves ETF “novices” vs. 45% in 2013
  • 20% of ETF owners say ETFs make up at least a quarter of their total investments

Even with a perceived proliferation of ETFs on the market today, two-thirds (66 percent) of investors say there is room for more, according to a new study by Charles Schwab. Among them, nearly 60 percent say more ETFs will lead to increased competition and lower prices, and that continued product innovation is necessary to keep up with a changing market and economy. More than a quarter (28 percent) say that more product choice is the industry trend that has most benefited investors in the past few years.

The 2014 ETF Investor Study by Charles Schwab is the fourth installment of an annual online survey of more than 1,000 individual investors between the ages of 25-75 with at least $25,000 in investable assets who have purchased ETFs in the past two years or are considering doing so in the near term.

The study found that seven out of ten investors say they are confident in their ability to choose an ETF that is right for their investment objectives. Yet, even as investors are embracing choice, a surprising 38 percent of investors say they want a better understanding of how to choose an ETF. Thirty-nine percent would like to better understand how to best use ETFs in their portfolio.

“It’s clear that investors expect innovation and choice when it comes to ETFs, but that enthusiasm is coupled with a desire for a deeper understanding of how to choose and use the products,” says Heather Fischer, vice president of ETF platform management at Charles Schwab. “Although 40 percent of investors still consider themselves ETF novices, that group has been steadily shrinking and is down from 45 percent in 2013. What this means is that education remains a top priority but as ETF investors are becoming increasingly savvy, they are seeking products, strategies and access that go beyond the basics.”

A leader in the retail ETF market, as of May 31, 2014, Schwab had $210 billion in ETF assets custodied on its platform. Its proprietary Schwab ETFsTM had $20.5 billion in assets as of May 31, 2014.

A Healthy Serving of ETFs

ETFs make up an average of 18 percent of portfolios among those who own them. One in five owners says that ETFs account for 25 percent or more of their total investments, up from 16 percent who said the same thing in 2011.

Investors use ETFs to accomplish a variety of investment goals. Forty-four percent primarily use ETFs for core or long-term holdings, while 22 percent use them for tactical or short-term investments. And 34 percent of investors like ETFs for both long- and short-term holdings.

When asked to imagine their investment portfolio as a dinner menu:

  • 57 percent of investors compare ETFs to a side dish
  • 30 percent of investors look at ETFs as an optional dessert
  • 13 percent view them as the main entrée

While the majority of investors see ETFs as a side dish now, there is evidence that the portion is growing, and more are likely to see it as an entrée in coming years. Half of all investors expect that their portfolio will have a higher proportion of ETFs in the next five years.

When it comes time to buy ETFs, funding will come from cash: 44 percent will tap existing cash from money market or other accounts, and 40 percent will invest with new cash.

Confidence is Key

As investors gain a deeper understanding of ETFs their confidence grows. The most confident ETF investors– the 16 percent of all investors who say they are extremely confident in their ability to choose an ETF – see ETFs playing a more significant role in their portfolio:

  • 38 percent view ETFs as the main entrée of their investment portfolios
  • 63 percent expect to increase their ETF investments in the next year, compared to 46 percent of all investors

Education: Beyond the Basics

Forty percent of investors say they know more about ETFs today than they did last year. Sizable numbers of investors say they “have a good understanding” of many ETF basics, such as how they differ from other products (45 percent), the benefits and risks of investing in them (37 percent and 36 percent), and how to use ETFs for targeted exposure to certain asset classes (34 percent). The study shows that investors are looking for what is next and want education to advance their understanding of ETFs. The topics of highest priority, where perceived knowledge is low and a desire for more understanding is high, are as follows:

ETF Education Priorities

               
    Don’t understand     Would like to better
            understand
How to choose an ETF     21 percent     38 percent
How to best use ETFs in a portfolio     20 percent     39 percent
The tax implications of ETFs     27 percent     45 percent

How to best use more sophisticated Exchange Traded Products (ETPs)

    52 percent     34 percent
 

New Frontiers

This year’s study reveals that 39 percent of investors are curious to learn more about ‘smart beta1’ products that use fundamentally weighted indexes, low volatility or equal weight strategies, among others. Of that group, three quarters want a better understanding of the differences between smart beta strategies and nearly eight in ten want to know how to best use them in their portfolios. Nearly a third of investors are interested in learning more about Exchange Traded Notes and commodities ETFs.

Product and Strategy Interests

               
   

Don’t know

   

Would like to learn

     

anything about

   

more

Commodities ETFs     40 percent     32 percent
Exchange Traded Notes     63 percent     30 percent
Smart Beta ETF strategies     67 percent     39 percent
 

Investors are also interested in new ways to access ETFs. Three out of five want ETFs in 401(k) plans. The most attractive benefit, according to these investors, would be the ability to invest in market segments that are more accessible than mutual funds (37 percent). The appealing low cost of ETFs (24 percent) and their intra-day tradability (24 percent) followed. One in five respondents predicts that increased availability of ETFs in 401(k)s will be the most positive ETF trend for investors in the next several years.

“ETF investors welcome innovation and as they look ahead they believe that better education, more products and choices and the availability of ETFs in 401(k) plans will be one of the most critical developments for ETF investors over the next several years,” noted Fischer. “The future of ETFs certainly appears bright, but as an industry it is our responsibility to keep the flame alive with the right education and resources so investors can keep pace.”

About ETFs at Schwab

Schwab offers a range of resources to help clients choose ETFs that fit their investment needs, including the Schwab ETF Select List™; tutorials, education, research and tools available via Schwab’s online ETF center and the ETF Education Exchange®; and live events at local Schwab branches.

In addition to the 21 proprietary ETFs from Charles Schwab Investment Management, which can be bought and sold commission-free online in Schwab accounts, Schwab ETF OneSource offers investors and advisors access to the most commission-free ETFs anywhere in the industry2. Commission-free online trading is available to individual investors at Schwab, to the nearly 7,000 independent investment advisors who use Schwab’s custodial services and through Schwab retirement accounts that permit trading of ETFs.

About the 2014 ETF Investor Study by Charles Schwab

The 2014 ETF Investor Study by Charles Schwab is the fourth installment of an annual online survey of more than 1,000 individual investors between the ages of 25-75 with at least $25,000 in investable assets who have purchased ETFs in the past two years or are considering doing so in the near term.

Conducted by Koski Research from May 8 – 14, 2014, the study has approximately a 3% margin of error. Survey respondents were not asked to indicate whether they had accounts with Charles Schwab. All data is self-reported by study participants and is not verified or validated.

About Schwab

At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

More information is available at www.aboutschwab.com. Follow us on Twitter, Facebook, YouTube, LinkedIn and our Schwab Talk blog.

Disclosures

Through its operating subsidiaries, The Charles Schwab Corporation (NYSE: SCHW) provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; compliance and trade monitoring solutions; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and lending services and products. More information is available at www.schwab.com and www.aboutschwab.com.

Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Commodity-related products carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

Exchange Traded Notes (ETNs) are distinct from Exchange Traded Funds (ETFs). ETNs are debt instruments backed by the credit of the issuer and as such bear inherent credit risk. ETNs are not generally appropriate for the average investor.

Charles Schwab & Co., Inc. receives remuneration from third-party ETF companies participating in Schwab ETF OneSource™ for record keeping, shareholder services and other administrative services, including program development and maintenance.

Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affiliated with Charles Schwab & Co., Inc. Learn more at schwab.com/SchwabETFs.

(0614-4080)

1 ‘Smart beta’ strategies are non-market cap weighted strategies that include fundamentally weighted index strategies, low volatility strategies, equal weight strategies and others.

2 Conditions Apply: Trades in ETFs available through Schwab ETF OneSource™ (including Schwab ETFs™) are available without commissions when placed online in a Schwab account. Service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange processing fee applies to sell transactions. Certain types of Schwab ETF OneSource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including Schwab ETFs). Schwab reserves the right to change the ETFs we make available without commissions. All ETFs are subject to management fees and expenses. Please see Charles Schwab Pricing Guide for additional information.

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More ETFs, Anyone? Investors Say 'Yes, Please' (Graphic: Business Wire)
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Contact:

Charles Schwab
Erin Montgomery, 212-403-9271
Erin.Montgomery@schwab.com

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