Individual investors continue to demonstrate their affinity for exchange traded funds (ETFs), and ETF adoption appears to be headed for exponential growth in the years to come, according to a survey Charles Schwab & Co.
The firm’s latest ETF Investor Study reveals that, on average, ETF investors say more than a quarter of their portfolios (27 per cent) are currently in ETFs, up from just 16 per cent in 2012. Looking ahead, more than four in 10 ETF investors (42 per cent) say ETFs will be the primary investment vehicle in their portfolios in the future – a sharp increase from 2016 (28 per cent) – and investors expect to have one-third (33 per cent) of their portfolios in ETFs in five years.
This seventh annual survey explores the attitudes and behaviours of more than 1,200 ETF investors, more than one-third of whom said they would put more than USD50k into ETFs if given an extra USD100k to invest today, up from 28 per cent who said the same thing last year.
“It has been fascinating to watch attitudes toward ETFs evolve over the seven years we’ve done this survey,” says Heather Fischer, Vice President, ETF & Mutual Fund Platforms at Charles Schwab. “Each year, investors tell us that ETFs play an even greater role in their portfolios, and all signs point to that growth continuing,” she observed. “As investors have become more familiar with the versatility of ETFs, their confidence levels have grown. Half of ETF investors consider their understanding of ETFs at an intermediate level, and almost all (93 per cent) are now fully confident in their ability to choose an ETF that is right for their investment objective.”
A generational breakdown of the survey data shows that more than half of Millennials (56 per cent) say ETFs are their investment vehicle of choice, more than any other generation. Sixty per cent of Millennials surveyed expect to increase investments in ETFs in the next year, and most (63 per cent) expect ETFs to be the primary investment vehicle in their portfolio in the future.
Nearly 60 per cent of Millennials say they use ETFs to reach long-term goals such as building wealth and saving for retirement, which is consistent with older generations. However, Millennials are much more likely to consider holding only ETFs rather than solely investing in individual securities.
“Millennials continue to lead the charge when it comes to ETF adoption,” says Fischer. “Millennials have grown up with ETFs, and because of this familiarity they seem to be more comfortable than other generations in embracing them as their investment vehicle of choice – and enjoying the benefits of low costs, tax efficiency and transparency.”
While only one in 10 ETF investors is currently invested in socially responsible investments, there appears to be growing interest in these strategies. Almost half of ETF investors (46 per cent) believe it is important to invest in socially responsible funds because they want their investments to align with their beliefs, and half (51 per cent) would invest more in these strategies if more SRI product education was offered.
Socially responsible investing has already gained traction among Millennial ETF investors, with almost half (48 per cent) actively seeking out funds that use SRI strategies, and 63 per cent saying they believe SRI strategies can help them reach their investing goals.
When choosing an ETF, investors prioritise a low expense ratio (62 per cent) and total cost (60 per cent) above all else. When evaluating brokerages, the importance ETF investors place on the ability to trade ETFs commission-free has risen significantly over the last five years. Fifty-five per cent said the ability to trade ETFs without commissions or other brokerage fees is the most important or a very important consideration, compared to 38 per cent in 2012.
“ETF investors continue to demonstrate a strong desire for cost-effective ways to meet their investing goals,” says Fischer. “While costs have been trending downward across the industry, it’s clear that ETF investors still keep an eye on what they’re paying.”