Investors do not understand the risks of index funds and exchange-traded funds, says a new survey by Natixis Global Asset Management released Tuesday.
This limited understanding of index funds and ETFs could set investors up for surprises down the road, says the survey of 750 investors with at least $200,000 in investable assets.
More than three-quarters of investors agree that index funds and ETFs are a cheaper way to invest, but 71 percent also believe they are less risky, according to the survey. The findings suggest that many investors have expectations that do not reflect a full understanding of the risks of index funds versus their benefits, says Natixis.
In addition, 64 percent of investors think using index funds will help minimize investment losses, 69 percent think index funds offer better diversification, and 61 percent believe index funds provide access to the best investment opportunities in the market
In fact, according to a Natixis Portfolio Research and Consulting Group analysis, since 1928 investors in the S&P 500 Index have experienced a 10 percent market correction more than once a year and a 5 percent decline more than three times per year on average.
“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” says John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blind-side investors during volatile markets.”
The survey also found that 65 percent of investors say a traditional approach of equities and bonds in portfolio allocations is no longer the best way to pursue returns and manage investments. Seventy percent of investors want new strategies that are less tied to broad markets and 75 percent favor strategies that can help them better diversify their portfolios, an approach that would seem to open the door to wider ownership of alternative investments, Natixis says.
However, only half of investors actually own alternatives assets. Of those who do not own alternatives, half say alternatives are too risky and about one third admit they do not understand how alternatives work.
“It is encouraging to see investors are looking beyond traditional asset classes to build portfolios designed to help them reach their financial goals through the widest range of potential market conditions,” says Hailer. “However, it is clear the financial industry still needs to provide more education to help investors make informed decisions.”
Listed as outside threats that could create volatility are a global economic slowdown (listed by 41 percent of respondents), a domestic recession (37 percent), the Presidential election (35 percent) and oil prices (31 percent).