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For a growing number of investors, exchange-traded funds (ETFs) are being embraced as a mainstay of a diversified portfolio.
According to a survey conducted by Charles Schwab, a leading brokerage firm, half of respondents plan to increase their ETF holdings over the next year – a 22 percent increase over those who said the same in 2012.
Nearly one in ten investors (nine percent) now hold 50 percent or more of their portfolios in ETFs, more than double the four percent seen last year.
Cost and fees continue to be critical factors when making ETF buying decisions, but topping expense ratios and trade commissions is the concern among investors that ETFs could contain hidden fees.
Beth Flynn, vice president of ETF platform management at Charles Schwab, said: “Demand is up across the board, and investors who own ETFs appear to be more interested in the product than ever. We’re seeing less discussion of ‘if’ and more about ‘how’ investors will buy and use ETFs. We’re seeing an upward shift in sophistication among ETF investors, and a hunger to learn more.”
According to the survey, investors have a strong reaction to lack of transparency when it comes to cost: 94 percent say understanding an ETF’s total cost is important. Interestingly, clarity about a fund’s redemption fees or other hidden fees is considered the #1 cost factor, with 71 percent saying it is extremely important. This ranks ahead of expense ratios at 61 percent and trade commissions at 54 percent.
The ability to trade ETFs commission-free is most or very important to 45 percent of respondents. While 59 percent are inclined to trade ETFs at the firm offering the most ETFs commission-free, nearly half (48 percent) would not buy a commission-free ETF that assessed a fee for selling too early.
The survey also revealed that some investors are ready to take their knowledge of ETFs to the next level. Three in ten investors (31 percent) say they still need to know more about ETFs in order to invest more in them. Respondents are most interested in learning more about ETFs’ tax implications, with understanding how to best use them in a portfolio coming in a close second.
“Investors are ready to move beyond a rudimentary understanding of ETFs and get into the nitty gritty details on things like costs and taxes. We’re turning a corner on ETF education which is very good news,” said Flynn.
The top benefit of ETFs, according to survey participants, is that they can be bought and sold like stocks. That said, 53 percent said they believe ETFs are best suited for those in the market for the long term. This came in well ahead of those who felt they were well-suited for active traders at 40 percent.
In terms of which ETFs are in favour with investors these days, sector funds rank first with equity and international ETFs rounding out the top three. Among specialty ETFs specifically, respondents are most interested in purchasing commodity funds.
(The survey was conducted online and included more than 1,000 individual investors between the ages of 25-75 with at least $25,000 in investable assets and who have purchased ETFs in the past two years and/or are considering purchasing ETFs in the next two years.)