ETFs put another nail in mutual fund coffin: Schwab

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For any mutual fund companies that haven’t gotten the memo yet, investors and financial advisers want exchange-traded funds.

the 10th edition of Charles Schwab & Co.’s ETF Investor Study drives home the point that mutual funds, while still overshadowing the $6 trillion ETF market, are increasingly looked upon as if they were your father’s Oldsmobile.

The report, based on a survey of 2,000 individual investors between the ages of 25 and 75 with at last $25,000 in investable assets, shows a continued migration toward the ETF space. Survey respondents expect their share of ETFs in their portfolios to grow to 38% over the next five years, which is up from 29% today, and 94% of respondents expect to purchase ETFs in the next two years.

Perhaps most telling is 45% of non-ETF investors said they are likely to purchase ETFs within the next two years.

According to Todd Rosenbluth, director of mutual fund and ETF research at CFRA, at the end of last year global ETF assets represented just 14% of all long-term open-end fund assets, but during the fourth quarter of 2020 ETFs represented 39% of net fund sales.

“Future growth will be aided as more retail investors gain comfort in the ETF wrapper and younger investors look to ETFs to support a likely higher asset base,” he said. “For financial advisers, such insight is important as they look to support end-client objectives.”

According to the Schwab study, top reasons non-ETF users say they are likely to consider ETFs include, portfolio diversification (60%), easy to trade (49%), low cost (34%) and tax efficiencies (28%).

On the flipside, the top reasons non-ETF users say they are reluctant to buy ETFs include, lack of understanding about ETFs (46%), content with current investments (32%), prefer mutual funds (17%), and ETFs seem risky and complicated (10%).

“Education is a key ingredient to success in all aspects of investing, so it is very exciting to see the evolution that has taken place with ETF investors’ familiarity and comfort with ETFs,” said David Botset, senior vice president of product strategy at Schwab.

“Certainly, the myriad strengths of ETFs, from tax efficiency, to low fees, to transparency, have paved the way for investors to adopt them as foundational building block components of an investment portfolio,” he added. “This year we also asked non-ETF investors about their interest in ETFs. At a time when individual investors are particularly engaged in the markets, it is interesting to see that a significant pool of investors who have never dipped a toe into the world of ETFs are interested in adding these products to their portfolios.”

The growing appetite for ETFs, especially among financial advisers, has been cutting into mutual fund market share for years, but some fund companies have only recently jumped on the bandwagon. Franklin Templeton entered the ETF space a few years ago, but long-time holdouts T. Rowe Price, Gabelli, and Alger just added ETFs last year. And American Funds is still in the filing stages for its first ETF.

Meanwhile, Fidelity, JPMorgan, and American Century expanded their ETF lineup in 2020 and further in 2021 with actively managed ETF products.

While financial advisers represent the biggest users of ETFs for client portfolios, the Schwab report showed that among individual investors younger investors are generally most drawn to ETFs.

Breaking down the overall average of 29% current portfolio allocations to ETFs, investors between the ages of 56 and 74, defined as baby boomers, have 22% allocated to ETFs, while those between 40 and 55, Generation X, have 29% in ETFs.

Millennials, meanwhile, between the ages of 25 and 39, have 33% invested in ETFs.

However, looking ahead to 2025, millennials expect this percentage to rise 43%, higher than the 38% for Gen X, while Baby Boomers only expect it to climb to 29%.

“Over the decade we have conducted this study, ETF investors’ appetite and affinity for ETFs has grown dramatically,” said Botset. “Investors feel much more knowledgeable and confident in their abilities to use these products to help achieve their financial goals.”

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