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ETFs are the future building blocks of portfolios, says Schwab study

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ETFs are becoming an increasingly important part of investors’ portfolios, according to a new study by Schwab. On average, investors already using ETFs are now allocating one-fifth (21 per cent) of their total portfolios to ETFs, up from 16 per cent in 2012.

Moreover, these investors expect that number to jump to 25 per cent in the next five years, and one-third (34 percent) say ETFs will form the core of their investment portfolios in the future.
 
In its fifth installment, The 2015 ETF Investor Study by Schwab is an online survey of more than 1,000 individual investors between the ages of 25-75 with at least USD25,000 in investable assets who have purchased ETFs in the past two years.
 
According to the study, 31 per cent of ETF investors say they plan to increase their ETF investments in the next year while only three per cent foresee reductions. Among those who plan to buy more:
 
• 65 per cent say they’ll invest more in the ETFs they already hold
 
• 57 per cent say they’ll add new ETFs
 
Sixty-one per cent of ETF investors would consider using stock-based ETFs instead of individual stocks in their portfolio, and 55 per cent say they would consider using fixed income ETFs instead of individual bonds.
 
When it comes to the types of ETFs that investors want to hold, 64 per cent of ETF owners say that they are interested in both core and specialised ETFs, up from 56 per cent who said the same thing in the 2013 survey.
 
“In the five years we’ve conducted this survey, we’ve witnessed an evolution in how investors think about the role that ETFs play in their portfolios,” says Heather Fischer, Vice President of ETF Platform Management at Schwab. “More investors are viewing ETFs as the foundational component of a well-diversified investment portfolio, and we think that sentiment will continue to grow.”
 
More than half (59  ) of ETF investors currently have investments in an all-ETF portfolio, which was defined as a dedicated account or investment portfolio comprised solely of ETFs. For that group, all-ETF portfolios represent an average of 16.5 per cent of their total investments. One-third (32 per cent) say they are interested in an all-ETF portfolio that an advisor creates and manages for them while 41 per cent of ETF investors say they’d like to be able to build an all-ETF portfolio online themselves.
 
One-third (32 per cent) of ETF investors say they would consider using an automated investment service, often referred to as “robo-advisors,” to create and manage portfolios of ETFs for a portion of their assets.
 
The majority of investors are taking a “wait and see” approach to active ETFs – a third of investors (33 per cent) are unsure about active ETFs and 36 per cent say they wouldn’t consider adding the strategies to their portfolios at this time. However, one-third (31 percent) say they would consider using actively managed ETFs. Among the enthusiasts, 35 per cent simply prefer active management to passive investing, 28 per cent believe actively managed ETFs can add value in certain market environments or asset classes and another 30 per cent believe these ETFs could be a good complement to passive ETF strategies. On the other hand, 48 per cent of those who are not interested in active ETFs say the appeal of ETFs lies in the passive, low-cost nature of the strategies and 35 per cent say they don’t believe the products are worth the additional cost.
 
A resounding 41 per cent of ETF investors believe that commission-free ETF offerings are game-changing for investors. And, when evaluating the overall cost of an ETF, 87 per cent believe that trade commissions are important. In fact, 28 per cent only invest in commission-free ETFs at their brokerage firm and 17 per cent say they would move their account to a different brokerage firm to gain access to commission-free ETFs.
 
However, access to commission-free ETFs alone isn’t enough for ETF investors – they also demand transparency and access to a selection of commission-free ETFs that they believe is right for them. When evaluating commission-free ETF offerings, two-thirds of ETF investors (66 per cent) say it is extremely important to them to have transparent pricing with no hidden fees, 58 per cent say it is critical to have access to the “right” selection of ETFs and 46 per cent say it is extremely important that their brokerage firm offers ETFs that span the broadest number of different asset categories.
 
“ETF investors recognise that while price is critically important, so too are factors such as transparency and choice,” says Fischer. “Just like any other buying decision, a combination of price and quality is key. This year’s study shows that ETF investors are focused on both, as are we, in the value we strive to deliver to clients.”
 
The 2015 ETF Investor Study by Schwab uncovered notable differences in attitudes towards ETFs among different generations.
 
The prominence of ETFs within an overall investment strategy is particularly pronounced among younger ETF investors. Millennials (aged 25-35) say that ETFs currently make up an average of 41 per cent of their portfolios, compared to a 21 per cent share among all investors. Sixty-one per cent of Millennials plan to increase their investments in ETFs in the next year.
 
And, Millennials think the future of ETFs is bright. Seventy per cent of Millennials see ETFs as the core investment type in their portfolio in the future. Significantly, 77 per cent say they would consider using stock-based ETFs instead of individual stocks in their portfolios and 69 per cent would consider using fixed income ETFs instead of individual bonds.

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