Ever Wonder Why ETF's Are Becoming More Popular?
Exchange Traded Funds, commonly referred to as "ETFs," have become increasingly common in the investment world. In the last ten years alone, the value of assets held by ETFs has multiplied by nearly five, and now stands at over $3.4 trillion according to research firm Statista. You did not read that incorrectly - $3.4 trillion invested in ETFs! And we have reason to believe this ETF trend is still in its early stages.
Why the ETF surge? Do ETFs really provide advantages for investors?
In our view, there are a myriad of reasons ETFs have grown in popularity. As investors increasingly seek efficient, targeted, low-cost methods for diversifying portfolios into a variety of sectors, industries, countries, and even commodities, ETFs have emerged as one of the more popular investment vehicles.
Prior to the arrival of ETFs, the retail investor largely relied on mutual funds or ownership of individual stocks to create a diversified portfolio - which could be a challenging feat particularly when starting out with a modest sum of money. But then ETFs came along, and significantly altered the investment landscape. By providing individual investors the possibility of tracking the performance of an entire market, the investor no longer had to assume the risk and time (research) required to invest in single stocks. Not only do ETFs provide investors a greater set of tools to build a diversified portfolio, they often do so at relatively lower costs and with the possibility of improved performance.
Today, retail investors, institutional investors, and asset managers alike are building and managing portfolios using ETFs.
Back to the Basics
For investors who might need a refresher, ETFs are diversified baskets of stocks, bonds and other assets designed to track an index, sector, asset class, or even a specific category of companies. For example, on a broader basis there are ETFs that track entire countries like the US, Europe, or Emerging Markets. But then as you get more specific, you can find ETFs for individual countries ranging from Germany to Peru, or sectors like Regional Banks or Medical Devices, to specific categories like Clean Energy or High Dividend stocks. The list is quite literally in the thousands, with a total of 1707 ETFs in the US and 3598 equity ETFs worldwide, according to Statista. Although the earliest ETFs invested primarily
in stocks, today they invest in everything from oil futures to floating rate bonds to volatility contracts.
Who is Using ETFs, and Why?
Blackrock, the largest ETF provider, conducted some research recently to dig deeper into who was buying ETFs, and why. Some of their findings are worth sharing:
- Why do investors use ETFs?
- 37% to invest in a specific sector
- 25% for single country exposure
- 65% believe a mix of mutual funds and ETFs is the best approach to building a portfolio
- ~30% of investors plan to increase their use of ETFs for long-term investing
- The average holding period for an ETF is nearly 6 years
- Only 5% of investors use ETFs for less than a year
- Only 23% of investors recognize ETFs to be more tax efficient than mutual funds
- Only 32% of investors know that ETFs can be used for bond investing
So, who is buying ETFs? The findings of the "BlackRock ETF Pulse Survey" lay it out as follows:
One of the reasons offered by Blackrock for why 'Boomers' are lagging behind other groups is similar to a point made above - that before ETFs, many individual investors came of age in an extended bull market where stock picking was the mentality and approach. What many of these Boomers may not realize, however, is that ETFs can be traded just like stocks, with the potential for lower risk via broader diversification.
The children and parents of the boomers, however, are purchasing ETFs in record numbers. According to Blackrock, Millennials (age 21 - 35) saw ETF adoption jump from 33% in 2016 to 42% in 2017, while Silvers (71 and older) also saw a big jump from 22% to 37%.
Bottom Line for Investors
Even with ETFs' exponential growth over the years, they still account for less than 6% of the U.S. stock market. By comparison, mutual funds hold around 23%. That gets back to our earlier point about ETF adoption being in its early stages. As more investors become familiar and comfortable with ETFs, adoption is likely to increase over time in our view. Investors appear to us to be increasingly interested in diverse markets, asset classes, and perhaps most importantly, lower costs - all of which ETFs can offer.
Please keep this in mind as you make your plans for 2018. Also keep your eyes open for any trends that could be beneficial to your portfolio.
One such trend to consider is how technology has innovated the investment industry with the rise of robo advisors by:
- Investing exclusively with ETFs
- Simplifying the investing process
- Automating tax efficiency and portfolio rebalancing
- Lowering fees
For further information on how Zacks Advantage provides sophisticated wealth management for fees as low as just 0.35% read our Overview Guide, available for download here.
|
