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Schwab study in the US finds investors continue to favour ETFs


Texas-based Schwab Asset Management, which manages USD575.9 billion on a discretionary basis and USD34.4 billion on a non-discretionary basis, writes that ETF investors have faced a turbulent environment marked by high inflation, rising interest rates and market volatility, yet they have continued investing in ETFs and foresee the product making up a larger share of their portfolios in the future.

At the same time, they are also interested in exploring investing options that will allow them to better personalise their portfolios, according to “ETFs and Beyond,” a new study by Schwab Asset Management.

Schwab, which has studied the attitudes and activity of ETF investors for more than a decade, found that ETF investors continue to view ETFs as a key part of their portfolios, with 80 per cent saying ETFs are their vehicle of choice, up from 71 per cent in 2020. ETFs now make up 33 per cent of ETF investor portfolios, up from 27 per cent five years ago, which tracks to the rate of growth those surveyed by Schwab predicted in 2017. Looking ahead, ETF investors expect 40 per cent of their portfolios to be in ETFs in the next five years. And an overwhelming majority (93 per cent) expect to purchase ETFs in the next two years, while 41 per cent of non-ETF investors are also likely to do so.

“ETF investors have continued adding ETFs to their portfolios at a strong clip over the last ten-plus years. This speaks to the strengths of these products and their ability to deliver exposures, cost effectiveness, tradability, and tax efficiency investors seek through multiple market cycles,” says David Botset, Managing Director, Head of Equity Product Management and Innovation, Schwab Asset Management. “Sustained interest among current ETF investors combined with interest from those who have never invested in ETFs is a very promising sign for more growth ahead.”

The firm writes that ETF investors largely stayed the course with their ETF investments during the first half of 2022 despite a very challenging market environment. About half of ETF investor respondents said that market disruptions — including market volatility, rising interest rates and high inflation — did not impact how they invested in ETFs. Nearly one-third put more money into ETFs in response to these disruptions and around one-fifth took money out of ETFs.

In the year ahead, ETF investors plan to invest in U.S. equities (56 per cent), real assets (47 per cent), fixed income (47 per cent), and cryptocurrencies (46 per cent) via ETFs. When it comes to specialty ETFs, they plan to invest in dividend ETFs (53 per cent), long/short ETFs (34 per cent) and leveraged ETFs (33 per cent). Newer categories are gaining steam too with about one-third (32 per cent) planning to purchase actively managed ETFs, 27 per cent planning to purchase ESG ETFs and 26 per cent planning to add thematic ETFs to their portfolios.

The Next Frontier: Personalisation

Schwab writes that ETF investors are demonstrating an appetite for personalising their portfolios. “If requesting modifications to one’s investments was similar to asking for dressing on the side when ordering at a restaurant, 43 per cent of ETF investors would be very likely and 48 per cent would be somewhat likely to request modifications”, the firm says.

“Many ETF investors say it is extremely important to them to have more control and a greater ability to customise their investments, to optimise tax liabilities in their portfolios, and to align their investments with their personal beliefs and values.”

One of the fastest-growing areas of personalised investing is direct indexing and 46 per cent of ETF investors are interested in learning more. One-third of ETF investors say they are very likely to invest in direct indexing in the next five years. ETF investors are also interested in being able to invest in long-term trends or macro themes (54 per cent) and nearly half (46 per cent) are interested in ESG-only portfolios.

When it comes to how they will personalise their portfolios in 2023, 37 per cent of ETF investors are very likely to invest more in companies or funds that align with their personal values, while 29 per cent will divest from companies that do not align with their values. One-third are very likely to invest more in investments that correspond to a particular theme.

“While their appetite for ETFs remains robust, ETF investors are also interested in exploring ways to tailor their investments to their personal situations, goals and preferences,” says Botset. “For some, personalisation goals can be met by investing in ETFs that align with their preferences, but for others, new solutions such as direct indexing may offer a more refined approach to meeting their investment and personalisation objectives.”

Millennial Snapshot

Schwab writes that it has closely followed the attitudes of Millennial ETF investors over the last decade and the research continues to show that this generation has a particular affinity for ETFs. This year’s study found that Millennials are also more interested in personalisation than their older counterparts.

Millennial ETF investors have more of their portfolios in ETFs today compared to other generations and they see a larger percentage of their portfolios in ETFs in the next five years compared to Gen X and Boomers.

The firm writes that these younger investors are more likely to be extremely confident about their abilities to choose ETFs that can help achieve their investment objectives and to meet their desired investing outcomes. They are primarily focused on building wealth for major life milestones (66 per cent) and saving for retirement (63 per cent).

“Millennial ETF investors show greater levels of interest in aligning their investments with their personal beliefs and values and more of them say they will personalise their portfolios further in 2023. Accordingly, Millennials are more interested in newer approaches to investing that allow for the expression of personal preferences like ESG, thematic investing and direct indexing compared to other generations”’ the firm says.

“The Millennial generation’s confidence in selecting and usage of ETFs is high,” says Botset. “Additionally, Millennials report the most interest in personalised options such as direct indexing compared to other generations, their adoption of ETFs continues to grow, and ETFs continue to be the preferred option for many at this stage of their investing lives.”

Across all generations, many investors who are not invested in ETFs are showing interest, which could boost industry growth as these investors turn interest into action. Nearly three-quarters (72 per cent) of non-ETF investors are interested in learning more about ETFs and 41 per cent say they are somewhat or very likely to invest in ETFs in the next two years. The top reason they report for investing in ETFs is to diversify their portfolios (55 per cent).

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