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Investor appetite for ETFs on the rise, says new Schwab study

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Forty-four per cent of individual investors 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 USD25,000 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 per cent who plan to invest more, just two per cent 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 per cent 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 per cent of all investors say they don’t know how to use ETFs across asset classes, and more than 25 per cent 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," says Beth Flynn, vice president of ETF Platform Management at Charles Schwab. "As more flavours of ETFs come to market, it is clear that the emphasis on education will be more important than ever."

Half of ETF owners surveyed say they use these products to access specific sectors or markets, and 44 per cent 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 per cent of respondents also report interest in commodity ETFs, and more than one in four (26 per cent) say they are considering fixed income funds for their next ETF purchase.
The survey finds that ETFs comprise, on average, almost 20 per cent of ETF investors’ portfolios, and individual funds are held by investors for an average of 1.5 years.

The study reports that the cost of an ETF is the No1 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 per cent 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.

The study found that only eight per cent 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(TM) 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," says Flynn.

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