While some in the fund servicing industry say that the ETF market is overcrowded with products, a new study by Charles Schwab finds that investors believe there is still plenty of room for growth. To seize the opportunity, wholesalers and ETF distributors must continue to thoughtfully innovate in anticipation of investor needs. More important, they must focus on making sure that advisors have access to the education and resources necessary to keep pace.

That's the takeaway for fund providers based on a new Schwab study that finds investors, and therefore advisors, are embracing innovation and choice but still have an appetite to learn more about ETFs. The 2014 ETF Investor Study by Charles Schwab is the fourth installment of an annual online survey of more than 1,000 individual investors between the ages of 25-75 with at least $25,000 in investable assets who have purchased ETFs in the past two years or are considering doing so in the near term.

The study found that seven out of 10 investors say they are confident in their ability to choose an ETF that is right for their investment objectives. Yet, even as investors are embracing choice, a surprising 38% of investors say they want a better understanding of how to choose an ETF. Thirty-nine percent would like to better understand how to best use ETFs in their portfolio. Strong demand for ETFs, and an increasingly knowledgeable investor base, is good news for fund providers. At the same time, there's clearly room for more improvement. The providers that stand out may be those that can both provide the right product solutions and deliver the guidance to help investors and their advisors make good investing choices. Here, Heather Fischer, vice president of ETF platform management at Charles Schwab Investment Advisory, discusses what their latest research means for fund providers and advisors.

Q: What are some of the main takeaways from your survey that providers should care about?

Fischer: We probed on the topic of product proliferation. We asked investors 'what do you think about the number of ETFs that are on the market today?' And what we found surprising is that two-thirds say there is room for more. Among them, 57% say innovation is necessary to keep up with a changing market and world, and 57% say that innovation and development leads to healthy competition and better pricing - a good thing for investors. Demand for ETFs is strong and it is growing, which is good news for manufacturers, of course. On average the investors we surveyed have 18% of their portfolio in ETFs. In 2012, it was 16%. Perhaps more importantly, half of the investors we surveyed expect to increase the percentage of their portfolio in ETFs in next five years. We think this shows that investors are past the awkward dating stage when it comes to ETFs, and they are ready to commit. What this means is that wholesalers must continue to understand their needs better, and advisor education is a key component.

Q: You have said your ETF OneSource platform has been your greatest ETF distribution success. How so?

Fischer: Schwab ETF OneSource provides investors with access to 119 commission-free ETFs - the most in the industry. And clients are embracing it. Approximately half of the ETF flows at Schwab go into OneSource ETFs, and that is split about evenly between advisors and retail customers. We launched ETF OneSource in February 2013 because we knew that commissions were a pain point for investors. Our goal was to bring investors a great selection of ETFs from leading providers. Today, the six providers are State Street SPDR ETFs, Guggenheim Investments, PowerShares, ETF Securities, United States Commodity Funds and Charles Schwab Investment Management. What really sets us apart in the industry is that we have a sustainable model that is a win-win-win for investors, providers and Schwab. It is straightforward - investors pay no commissions, and there are no catches like having to pay short-term redemption fees.

Q: Your ETF OneSource platform was modeled based on your Mutual Fund OneSource platform. How do you expect the ETF OneSource platform to grow?

Fischer: We do look at Mutual Fund OneSource as a template - it was a revolutionary idea when it was introduced more than 20 years ago. It launched with eight fund families and 80 funds, and today that number stands at over 4,000. The 119 ETFs on the ETF OneSource platform today are only the beginning. We will grow thoughtfully and wisely, and are planning to expand the offering later this year with additional providers and ETFs.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.