Investors’ knowledge and use of exchange traded funds nearly doubled over the past five years, and 42% expect ETFs to become their primary investment vehicle in the future, according to Charles Schwab’s 2017 ETF Investor Study.
The seventh annual study interviewed 1,264 investors in June between the ages of 25 and 75. They needed to have purchased an ETF in the last two years and have at least $25,000 in investable assets.
Eight percent of the investors said their portfolios already consist of only ETFs and 43% would consider holding only ETFs instead of individual securities.
The millennials generation has taken to ETFs the most — 56% of them say they’re their investment vehicle of choice. Among the members of Generation X, 44% said ETFs were their favorite vehicle; for baby boomers it was 30%; and for matures, those older than baby boomers, it was 23%.
Of millennials, 60% expect ETFs to be their primary investment vehicle in the future. That drops to 45% among Generation X, 23% among baby boomers and 17% for matures.
At least some financial advisors are scratching their heads over the survey results. “I haven’t found that to be the case,” said Robert Karn, president of Karn Couzens & Associates, a registered investment advisor in Farmington, Conn. “Many of our clients have heard about ETFs, but they don’t know what they do. I don’t see millennials leading the charge. I don’t see in my practice what they’re saying in the survey.”
A low expense ratio is the most important factor in choosing an ETF, according to 62% of the respondents. Total cost was second, followed by, in declining order, the ETF provider’s reputation; how well it tracks its index; its historical returns; its liquidity/trading volume; if it’s commission-free; its exposure to a specific part of the market; its Morningstar rating; and finally, its total assets.
Investors are placing increased importance on the ability to trade ETFs without commissions. This year 55% said working with a brokerage that offered commission-free ETFs was very or most important, up from 38% in the 2012 survey.
Only 1 in 10 currently invest in socially responsible investments (SRI), 55% say they’ve heard about SRI and 35% don’t even know what SRI is. However, interest in SRI is growing. About 51% of the respondents said they would invest in SRI strategies if more education on products or asset allocation were provided.
Still, almost half of the ETF investors said it was important to them to invest in funds that align with their beliefs, 30% said they would actively seek out socially responsible funds and 42% preferred a strategy that was tailored to their values. About 53% said they had a “pretty good understanding” of how socially responsible their investments are and 46% said it was important to invest in socially responsible funds because they want their investments to align with their beliefs.
Interest in SRI investing is highest among millennials at 48%. Only 32% of Gen X investors seek out SRI strategies. That drops to 14% for baby boomers and 9% for matures.
“It surprised me how it reinforced my understanding of the demographic tilt toward ETFs,” said Steven Schoenfeld, founder and chief investment officer at BlueStar Indexes, which provides the benchmarks for the VanEck Vectors Israel ETF (ISRA) and the ETF Managers Trust BlueStar TA-BIGITech Israel Technology ETF (ITEQ). “It shows the appeal when people see they can do almost as well, if not as well, by aligning their values. It just makes them feel better and might make them better investors if their connection is more than just better returns. Then when the market gets volatile they might stick with it.”
With smart beta, 29% of the respondents said they currently invest in smart beta strategies and 59% said they planned to increase their investments in smart beta in the next year. About two-thirds of ETF investors have reduced active exposures over the last three years and replaced them with smart beta exposures.