Low cost of ETFs continues to resonate with investors, finds Morningstar

May 29th, 2013 | By | Category: ETF and Index News

Investment analytics and research provider Morningstar has released the results of its fifth online survey of UK investors into the appetite, understanding and use of exchange-traded funds (ETFs), with results showing the ever-increasing importance to investors of one of the hallmark attributes of ETFs – their low cost.

ETFs’ low costs continue to resonate with investors, finds Morningstar

The low cost of ETFs continues to resonate among UK investors, with 91% of current ETF investors citing cost as being either “very important” or “important”.

The survey captured a broad range of investors, including both private individuals and professionals, who are either interested in or already investing through ETFs.

Of the major findings, the low cost of ETFs continues to resonate, with 91% of current ETF investors citing ETFs’ low costs as being either a “very important” or “important” attribute, compared to 89% last year.

Prospective ETF users are also putting greater focus on ETFs’ low costs, with 71% now citing this attribute as being “very important”, compared to 57% last year.

Of those respondents that currently invest in ETFs, the majority own them in an amount that is less than 20% of the value of their overall portfolio. Current users also appear to be a buy-and-hold bunch, with 63% reporting that they plan to trade their ETF holdings only occasionally.

The survey shows that the distinction between physical and synthetic replication remains important in their investment decision, with 85% of survey participants stating a specific preference for physically replicated funds over synthetic-replication funds. Although this result is slightly lower than the 89% that responded similarly in last year’s survey, perhaps owing to reduced fears of a collapse in the European banking system, it is still significant.

Investors remain wary of the counterparty risk inherent in swap-based ETFs, despite the fact that these products are often over-collateralised. As a result of these persistent investor concerns, leading European synthetic ETF providers, such as Lyxor and db X-trackers, have made strategic changes to their product line-ups in recent months by launching new ranges of ETFs which use physical replication.

The intraday trading feature of ETFs has also grown in consideration among both current ETF investors and prospective ETF users, with 40% and 21% of them respectively citing ETFs’ intraday liquidity and trading as being a “very important” attribute. These results compare to comparable figures of 28% and 16%, respectively, from one year ago.

Ease of diversification across various asset classes is an ETF trait also largely recognised by investors, with 82% of survey participants seeing themselves using or recommending ETFs for this particular reason. However, only 34% of respondents indicated that they would use or recommend ETFs to complement active managers.

More than a quarter of respondents identified iShares, part of global investment giant BlackRock, as the best-publicised ETF brand, followed by relative newcomer Vanguard. Vanguard launched in the UK in May 2012, though has been active in the US ETF space since 2001.

Commenting on the findings, Hortense Bioy, director of European passive fund research at Morningstar, said: “In a world of low expected returns in all asset classes, it comes as no surprise to see greater focus on costs, and costs associated with ETF investing are no exception. The Retail Distribution Review and entrance of ultra-competitive providers like Vanguard in the ETF marketplace, have clearly contributed to further raising the UK investors’ awareness of the low cost nature of ETFs.”

She added: “Meanwhile, the growing appeal of ETFs’ intraday trading suggests a better understanding of the flexibility that ETFs offer over other types of passive investment. There is, however, still a need for education, especially among those prospective ETF investors.”

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