Slideshow 8 factors driving explosive ETF growth

Published
  • September 19 2017, 2:50pm EDT
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Most clients choose ETFs to reach their long-term goals

Which clients are asking for more ETFs? The answer: All of them.

Demand for ETFs is expected to grow exponentially in the coming years, according to a recent study. Investors say more than a quarter of their portfolios (27%) are invested in the funds, up from 16% in 2012, according to the latest ETF Investor Study by Charles Schwab. Nearly 42% of the 1,200 ETF investors polled say the funds will be a primary component of their portfolios in the future, up from 28% in 2016. Around one-third said they would invest more than $50,000 if they were given $100,000 today, up from 28% last year.

“As investors have become more familiar with the versatility of ETFs, their confidence levels have grown,” said Heather Fischer, vice president of ETF and mutual fund platforms at Schwab. “Half of ETF investors consider their understanding of ETFs at an intermediate level, and almost all (93%) are now fully confident in their ability to choose an ETF that is right for their investment objective.”

Of all age groups polled, millennials are most likely to include the funds in their portfolios. Nearly 60% said they expect to use ETFs to reach their long-term investing goals. Sixty-two percent said they would rather hold ETFs than individual securities, according to the report.

“Millennials continue to lead the charge when it comes to ETF adoption,” Fischer said, adding that because the age group has grown up with the funds, “they seem to be more comfortable than other generations in embracing them as their investment vehicle of choice — and enjoying the benefits of low costs, tax efficiency and transparency.”

Scroll through for the most significant findings on ETFs reported in the study.

Confidence in ETFs on the rise

“When we first started [the study] five or six years ago, the number of people who self-described themselves as a beginner was around 46%. That's dropped to 27% this year,” Fischer said in an interview at Morningstar’s ETF Conference in Chicago. “It's a pretty dramatic shift.”

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Preference for ETFs taking hold across age groups

“I think the level of knowledge has certainly increased — the amount of information available, and just a growing familiarity with ETFs as an investment vehicle, which is frankly much more mainstream now than it used to be,” Fischer said.

What’s attractive: Low expense ratios, costs and reputation

“ETF investors continue to demonstrate a strong desire for cost-effective ways to meet their investing goals,” Fischer said. “While costs have been trending downward across the industry, it’s clear that ETF investors still keep an eye on what they’re paying.”

Almost half say ETFs are everything

“I think there are a couple of factors at play here in terms of why ETFs are growing,” Fischer said. “Brokerage firms like Schwab play a role in helping clients get smarter about their ETF investing; absolutely asset managers and money managers do … and advisors, too.”

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Niche appeal

“I think we have to continue to develop education, develop content and develop resources for the spaces that are new,” Fischer said. “[Investors] are telling us, ‘Yeah, I don’t have that much in [socially responsible investing], yet,’ but 46% say, ‘Hey, I’d be interested in that — it’s important to me.’ About half of investors that we studied said, ‘I would invest more if I had more education.’”

Desire to do good

“There's a lot of areas of improvement in commodities and alternative SRI, so I would argue that the market, by demand, will tell us what we need,” according to Anthony Davidow, Schwab's vice president of alternative beta and asset allocation strategist. “I would argue that we're so relatively young, as an industry, that there's still room for growth.”

Millennials are big on ETFs

“If overall investors are enthusiastic, [millennials] are jumping up and down,” Fischer said. “There are a lot of great things about other investment vehicles, as well, but it opens up an options set for all of these demographics. So I think that stat tells me that … millennials might be leading the way.”