Exchange-traded fund assets have risen dramatically over the past three years, though the products are not widely known, never mind understood, by retail investors. One of the reasons is that brokers and financial advisers aren't talking to clients about ETFs or really pushing them at all. That was one of the conclusions from a study commissioned by the American Stock Exchange and presented at its ETF conference held in New York last week. The study, conducted by Harris Interactive, bases its results on a survey of 2,337 investors and 200 brokers and financial advisers between August 29 and September 10, 2001.

Although 82% of brokers and advisers said they are very or somewhat familiar with ETFs, only 29% said they frequently or sometimes recommend them to clients, according to the study. For those who said they rarely or never recommend ETFs, the top three reasons were: the value of a broker or adviser is to recommend stocks or actively managed funds (79%); clients have difficulty understanding ETFs (63%); and the brokers and advisers themselves need to know more about ETFs (62%). Furthermore, only 24% of investors who know about ETFs said they were introduced to them by a broker or financial adviser, according to the study. The rest learned about them through the media, from friends, mutual fund mailings, retirement plan managers or investment seminars.

It stands to reason that how often financial intermediaries recommend ETFs would be largely dependent on whether they are commission-or fee-based. Of those surveyed, 53% were commission-based, 11% were fee-based, and 36% work on a combination of the two. However, there were no discernible trends regarding those factors and the responses given, according to Sandra Radoff, senior account director at Harris Interactive.

Strong Investor Response

According to the investor responses in the survey, a lot of opportunity exists for ETFs, Radoff said. The average investor currently allocates only 1% of his or her investments to ETFs, but 7% to index funds, the product that ETFs most closely resemble. When told briefly what an ETF was, 20% of investors said that they were very likely to invest in ETFs

"These are actually very healthy numbers," Radoff said. "If you did a new product concept test and you got numbers like this, you would definitely give the green light."

What's more is that after the same investors were given a list of 16 fundamental points about ETFs, 27% said they were very likely to invest in ETFs.

"To see a jump like that, after people were exposed to just a little information, is very significant," Radoff said.

Of those 16 points, the most persuasive, according to investors were that management fees are relatively low (54%), capital gains taxes are generally lower than most mutual funds (49%) and ETFs have advantages of both stocks and mutual funds combined (48%).

"These are the rational reasons that people took away that would persuade them," Radoff said. "Still, as we know, in advertising, it's not always the rational that's the key to effectively marketing a product."

Fitting the Profile

Consequently, Harris sought to determine what the characteristics of investors who reacted positively to ETFs are. "Investor savviness" and "openness to risk" were the top two. Openness to risk may not seem like it fits with ETFs, often seen and used as a risk management product, however the risk here refers to a willingness to invest in a new or unknown product, according to Radoff. Investors' savviness is important because the advantages of ETFs are often compared to those of mutual funds, yet many investors do not even really understand how basic mutual funds work, Radoff said.

"The savvier and more knowledgeable an investor, the more likely they will believe ETFs are a product for them," Radoff said. "The core target for ETFs is male, somewhat younger, high asset, high income, and the really key factors are their willingness to accept risk and knowledge about investments."

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