Investor Appetite for Exchange-Traded Funds (ETFs) on the Rise, Says New Schwab Study

Forty-four percent plan to invest more; nearly half need more schooling on ETFs

Thursday, September 22, 2011 5:00 am PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NYSE:
SCHW
"Individual investors are simply not satisfied with their own knowledge of ETFs and want to learn more"

SAN FRANCISCO--(BUSINESS WIRE)--Forty-four percent of individual investors surveyed plan to invest more in ETFs over the next 12 months, and eight in ten who currently own ETFs say they will invest more in ETFs over the next two years, according to a new study from Charles Schwab, a retail marketplace leader for ETFs.

The ETF Investor Study by Charles Schwab is an online survey of more than 1,000 individual investors with at least $25,000 in investable assets and familiarity with ETFs. The study was designed to gauge individual investors’ attitudes toward and understanding of ETFs, and how or if they would use them as part of their investment portfolios. Nearly two-thirds of all respondents to the survey own ETFs; while the remainder plan to invest in an ETF in the next two years.

The study shows investors’ appetite for ETFs in several ways: in addition to the 44 percent who plan to invest more, just two percent say they will decrease their ETF investments. According to the study, the boom in interest is driven in part by a distinct set of benefits unique to the product. ETF owners say the biggest benefit of ETFs is that they trade like stocks, while those considering them cite diversification as the top benefit.

But the study also offers insights on the gaps that still exist in investors’ knowledge about ETFs. Forty-six percent of investors surveyed call themselves ETF “novices,” and one-fourth of all respondents indicate that they do not understand their costs or how to best use them. Thirty-one percent of all investors say they don’t know how to use ETFs across asset classes, and more than 25 percent know nothing about the difference between actively managed and index-based ETFs.

“Individual investors are attracted to the efficiency and flexibility of ETFs, but many do not have a solid grasp on how they work,” said Beth Flynn, vice president of ETF Platform Management at Charles Schwab. “As more flavors of ETFs come to market, it is clear that the emphasis on education will be more important than ever.”

ETFs Are Used for Market Access and Asset Allocation

Half of ETF owners surveyed say they use these products to access specific sectors or markets, and 44 percent use them to invest in core asset allocation strategies. Sector ETFs were cited as the type most frequently evaluated for purchase, followed closely by equity and international ETFs. Thirty-four percent of respondents also report interest in commodity ETFs, and more than one in four (26 percent) say they are considering fixed income funds for their next ETF purchase.

The survey finds that ETFs comprise, on average, almost 20 percent of ETF investors’ portfolios, and individual funds are held by investors for an average of 1.5 years.

Cost is Key: Expense Ratio Trumps Trade Commissions

The study reports that the cost of an ETF is the #1 factor that matters to investors when choosing an ETF, followed by a fund’s performance history and the reputation of the ETF sponsor. When asked which specific components of cost are most important, respondents named the fund’s expense ratio first, followed by trade commission. In fact, 43 percent of investors say that the ability to trade a fund commission-free is important but not the only factor to consider when choosing an ETF. Premium and discount pricing, and a fund’s bid/ask spread, ranked third and fourth respectively.

Back to School for ETFs

The study found that only eight percent of ETF owners consider themselves experts on ETFs, saying their top challenge is that there are just too many choices. For those considering making ETF investments, the biggest challenge is not knowing how to buy or sell them. And all study respondents are ready to learn:

  • Investors considering ETFs are most interested in learning how to use them; they also want to know more about ETF costs.
  • Owners want more education on choosing asset classes to access with ETFs; learning more about buying and selling ETFs is of least interest.

“Individual investors are simply not satisfied with their own knowledge of ETFs and want to learn more," said Flynn, who noted that Schwab’s education efforts include the ETF Select List™ that helps narrow product choices, as well as access to online tutorials and research. “This combination of high investor demand for ETFs with low understanding makes an obvious case for more tools and better education across the investment spectrum,” said Flynn.

Charles Schwab continues to be a leader in the retail ETF market, with $119 billion in assets custodied on its platform as of August 31, 2011. Schwab ETFs™, which can be bought and sold commission-free online** in Schwab accounts, had $4.3 billion in assets as of August 31, 2011. In addition to the impressive value of its 14 proprietary ETFs, Schwab offers a host of resources to help clients choose ETFs that fit their investment needs, including the Schwab ETF Select List; tutorials, research and tools available via Schwab’s online ETF center; and live events at local Schwab branches.

Commission-free online trading** of Schwab ETFs is available to individual investors at Schwab, to the more than 6,000 independent investment advisors who use Schwab’s custodial services and through Schwab retirement accounts that permit trading of ETFs.

About the ETF Investor Study by Charles Schwab

The ETF Investor Study by Charles Schwab was an online survey of U.S. investors conducted by Koski Research in August 2011, and has a 3.15% margin of error. A total of 1,010 respondents completed interviews. Survey respondents had a minimum of $25,000 in total investable assets, ranged in age between 25 and 75, and either own or are considering purchasing ETFs. 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. Investors participated in the study between August 4 and August 15, 2011. Detailed findings can be found at www.aboutschwab.com/press/research/etf_investor_study.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 300 offices and 8.2 million client brokerage accounts, 1.5 million corporate retirement plan participants, 765,000 banking accounts, and $1.65 trillion in client assets. Through its operating subsidiaries, the company 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; 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 mortgage services and products. More information is available at www.schwab.com and www.aboutschwab.com. (0911-6013)

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**Restrictions Apply: Online trades of Schwab ETFs™ are commission-free at Schwab, while trades of third-party ETFs are subject to commissions. Broker-Assisted and Automated Phone trades are subject to service charges. Minimum $1,000 deposit is required to open most Schwab brokerage accounts. Waivers may apply. See the Charles Schwab Pricing Guide for details. All ETFs are subject to management fees and expenses.

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 1-800-435-4000 or by visiting www.schwabetfs.com. 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.

Since a sector fund is typically not diversified and focuses its investments on companies involved in a specific sector, the fund may involve a greater degree of risk than an investment in other mutual funds with greater diversification.

Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affiliated with The Charles Schwab Corporation or any of its affiliates.

Not FDIC Insured • No Bank Guarantee • May Lose Value

© 2011 Charles Schwab & Co., Inc. Member SIPC

Contact:

Charles Schwab
Alyson Nikulicz, 212-403-9240
alyson.nikulicz@schwab.com
or
The Neibart Group
Holly Holt, 718-875-2122
hholt@neibartgroup.com

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