Exchange-traded funds (ETFs) have quickly grown in popularity with investors because of their transparency, liquidity, tax efficiency and low costs and fees compared to actively-managed fund offerings. And the growth of assets invested in ETFs shows no sign of slowing down in 2017, according to BlackRock's "ETF Pulse Survey."
Insights Into ETF Investors
BlackRock's survey reveals that just over half of all investors polled intend to buy an ETF within the next year, and 25% of investors are already using ETFs now. Nearly 95% of all financial advisors who were polled said that they will purchase ETFs for their clients in the coming year, and just over 80% are currently using ETFs in clients' portfolios. Other key findings include:
- Investors who own ETFs tend to trade more actively and keep less of their money in cash compared to investors who don't.
- 90% of investors who currently own ETFs plan to add to their ETF holdings in 2017 and almost 80% feel optimistic about their financial future in 2017.
- Millennials have the highest percentage of ETF ownership. About a third of those who were polled responded that they own these funds compared to a quarter of investors overall. And 70% of Millennials indicated that they intended to purchase an ETF in 2017 compared with just over half of investors overall.
The survey also revealed that the average holding period for ETFs is five years. Just over half of investors and nearly 70% of advisors use them because of the diversification that they offer. And 43% of investors, plus nearly twice that number of advisors, use them to gain exposure to large market indices, while a slightly smaller percentage use them to gain exposure to a specific market sector. BlackRock found that almost a third of investors and nearly twice that percentage of advisors invest in ETFs because of their low management fees, with a slightly smaller percentage of investors choosing these investments for their low transaction costs. (For more, see: Avoid ETFs With These Traits.)
Just over 40% of advisors ranked ETFs' ability to provide investments in very specific sectors as their second most desirable trait, while just over a third chose them because of their tax efficiency.
It's no surprise investors who purchase ETFs are doing so because of their low fees and expenses, diversification, transparency, liquidity and the ability to invest in very specific subsectors of the market. The survey also revealed that lack of information and education is the biggest reason why some investors don't yet choose ETFs. About 40% of investors responded that they are unfamiliar with these investments, while nearly a third said that they were unclear on how they work or how to choose the best ones for their portfolio. About a third of all investors also responded that they believe their current portfolios are already providing them with significant diversification. (For more, see: A Look At the Growth of the ETF Industry.)
ETF Factors to Consider
Investors who are looking to move some of their money into ETFs can use the following rules of thumb to help find an appropriate choice that will serve them well:
- Assets under management: Investors should probably stick to ETFs that have assets under management of at least $10 million. If the fund has less than that, it could be an indication of investor disinterest, which can translate to limited liquidity and a substantial spread between the bid and ask prices.
- Trading volume: Look for ETFs that have a higher trading volume, because this means that the fund is more liquid. Popular ETFs trade millions of shares a day. Those that are thinly traded will cost more to get out of when the time comes to sell.
- Underlying investment: ETFs that track broad, well-known indices are likely to have greater liquidity and tighter spreads between the bid and ask prices.
- Tracking error: Some ETFs don't track their benchmarks very closely. Investors should compare the ETF's performance versus its benchmark to see how accurately it is following the benchmark.
How Advisors Can Help ETF Investors
Financial advisors can help clients enter the ETF market through education. Seminars and classes can help clients and investors to learn about the benefits of ETFs and what they can do. Older clients may especially need to be educated about ETFs, as they may perceive these vehicles as dangerous or overly risky. Advisors can also help clients of all stripes to choose ETFs that fit their investment objectives and risk tolerance, so that they can maximize their returns with an appropriate amount of risk. (For more, see: How to Avoid Expensive ETFs.)
The Bottom Line
Exchange-traded funds will likely continue to grow in asset size and popularity among investors and advisors for the foreseeable future. While Millennials seem to be the demographic group that is most comfortable with them, financial advisors can help older investors understand their benefits as well. (For more, see: How to Pick the Best ETF.)