Exchange traded funds are slowly pushing into traditional mutual fund market space as more aggressive, high net worth and knowledgeable investors see the benefits of the easy-to-use, low-cost investment vehicle.
According to the Spectrem Group, high net worth investors and others who are knowledgeable about the broad range of investment vehicles available are using ETFs at a higher rate than other choices.
“Although Exchange Traded Funds have been in existence for 20 years, they are still considered a relatively new product, and therefore are still making inroads into wealthy investors’ portfolios,” George H. Walper Jr., President of Spectrem Group, said in the article.
Additionally, due to their relative newness, ETFs are not as well understood as mutual funds. Consequently, conservative investors have doggedly avoided the ETF vehicle, but more aggressive players are quickly picking it up. About 36% of “aggressive” investors own ETFs, compared to 14% of “conservative” investors, according to the Spectrem Group. [Index ETFs vs. Active Mutual Funds]
“The risk factor also explains why wealthier investors are more likely to purchase ETFs,” Walper added. “They can afford to make initial investments in alternative products.”
Nevertheless, investors are using ETFs as a way to diversify an investment portfolio. Additionally, with the low expense ratios, ETFs help reduce the overall cost of the portfolio. [The Benefits of Using ETFs]
The Spectrem Group found that 28% of investors now own ETFs, compared to 16% in 2008. Among ultra high net worth investors, who have $5 million to $25 million in assets, 47% utilize ETFs. About 45% of those who count themselves knowledgeable about the various investment choices available are investing in ETFs.
Of the investors who hold ETFs, 48% are using the investment vehicle because of the low operating expenses.
Additionally, investment advisors are playing an increasingly larger role in the spread of ETF usage. 44% of those invested in ETFs did so through the recommendation of an advisor. [Advisors Continue to Contribute to ETF Industry Growth]
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Max Chen contributed to this article.