From Money Managers to Mainstream: The Investment Tool that Might Outmode Mutual Funds
NEW YORK (MainStreet) Mutual funds may be the landline of investments. Everybody used to have one, they still exist (and some people swear by them to this day), but isn't it time to move on? More and more retail investors seem to think so, as they embrace exchange-traded funds (ETFs) as the must-have investment innovation.
Investors are putting more ETFs in their portfolios and are now ready to take their knowledge to the next level, learning more about the tax implications of ETFs and using them to gain exposure to additional investment niches. According to a study by Charles Schwab, half of the investors surveyed plan to increase their ETF holdings over the next year a 22% increase over those who said the same in 2012.
"Demand is up across the board, and investors who own ETFs appear to be more interested in the product than ever," says Beth Flynn, vice president of ETF platform management at Charles Schwab. "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."
The online survey sampled more than 1,000 individual investors between the ages of 25-75 who had 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.
Nearly one in ten investors (9%) said they now hold half or more of their portfolios in ETFs.
These individual investors are mostly leaning on ETFs for targeted sector exposure, in addition to equity and international investments. The survey noted that among specialty ETFs, respondents were most interested in purchasing commodity funds.
Now that consumers are getting more comfortable with ETFs, nearly one-third (31%) say they want to learn more about the investment vehicle, particularly regarding tax implications.
"Investors are ready to move beyond a rudimentary understanding of ETFs and get into the nitty gritty details on things like costs and taxes," says Flynn. "We're turning a corner on ETF education which is very good news."
According to the survey, cost and fees continue to be primary factors when making ETF buying decisions. Investors said they worry that ETFs could contain hidden fees and consider expense ratios as well as trade commissions when considering a purchase.
The top benefit of ETFs, according to study participants, is that they can be bought and sold like stocks. Even so, a majority (53%) believe ETFs are best suited for those in the market for the long term.
--Written by Hal M. Bundrick for MainStreet