Investor demand for Exchange Traded Funds (ETFs) remains unabated, according to a new ETF Investor Study by Charles Schwab.
An estimated 44% of respondents surveyed indicated they plan to invest in ETFs in the next year, while 80% of those who already own ETFs say they will invest in more of them over the next two years. Only 2% of respondents say they plan to decrease their ETF holdings in the next year.
Schwab's study surveyed more than 1,000 individual investors with at least $25,000 in investable assets and familiarity with ETFs.
The investor ETF boom is driven in part by a distinct set of benefits unique to the product, according to the study. ETF owners say the biggest benefit of ETFs is that they trade like stocks, while those considering them cite diversification as the top benefit.
Survey respondents indicated that cost is the number one criteria in investing in ETFs. Expense ratio topped trade commission in importance to investors.
An estimated 59% of respondents say expense ratio is "extremely important" versus 51% who say the same about commissions. On the topic of commissions, 23% only invest in commission-free ETFs, 16% say they choose firms based on commission-free ETF offerings, and 43% say being commission-free is important but not the only factor they consider.
An estimated 50% of ETF owners surveyed say they use these products to access specific sectors or markets, and 44% use them to invest in core asset allocation strategies. Sector ETFs were cited as the type most frequently evaluated for purchase, followed closely by equity and international ETFs.
Meanwhile, an estimated 34% of respondents also reported interest in commodity ETFs, and more than one in four (26%) say they are considering fixed-income funds for their next ETF purchase.
The survey finds that ETFs comprise, on average, almost 20% of ETF investors' portfolios, and individual funds are held by investors for an average of 1.5 years.
On the down side, the study revealed an "ETF knowledge gap" among investor respondents. An estimated 25% of respondents indicated that they don't understand ETF costs, or how best to use them. And only 8% of current ETF purchasers say they consider themselves experts on the financial instrument, while only 2% of investors who don't own ETFs consider themselves experts.
"Individual investors are attracted to the efficiency and flexibility of ETFs, but many do not have a solid grasp on how they work," said Beth Flynn, vice president of ETF Platform Management at Charles Schwab. "As more flavors of ETFs come to market, it is clear that the emphasis on education will be more important than ever."
Investors considering ETFs are most interested in learning how to use them; they also want to know more about ETF costs, according to the study. Owners want more education on choosing asset classes to access with ETFs; learning more about buying and selling ETFs is of least interest, the survey said.
"Individual investors are simply not satisfied with their own knowledge of ETFs and want to learn more,'' Flynn said. "This combination of high investor demand for ETFs with low understanding makes an obvious case for more tools and better education across the investment spectrum."