The upstart ETF market is challenging the mutual fund industry, driven by what Vanguard calls the “FACTS.”

“ETFs are increasingly popular among investors, and many in the investment community have discussed reasons for their rapid growth,” according to a Vanguard note. “Our analysis of a comprehensive data set of investor purchases at Vanguard identifies five key factors that play an important role in the ETF purchase decision. We dubbed them the FACTS: familiarity, access, costs, trading flexibility, and stocks.”

The FACTS:

  • Familiarity. The familiarity aspect refers to the likelihood of adding ETFs when an investor has already utilized the investment vehicle before.
  • Access. ETF accessibility has increased through the use of online brokerage accounts.
  • Costs. ETFs with lower expense ratios have proven to attract greater investment interest.
  • Trading Flexibility. Investors who like to keep a close watch over their portfolios will be more likely to invest in ETFs.
  • Stocks. Lastly, investors favor ETFs in a stock funds over fixed-income funds.

“The growth rate of ETFs has outstripped that of mutual funds over the past decade,” Vanguard said. “ETFs offer distinctive features such as greater trading flexibility and possibly lower costs than mutual funds, and many believe that these factors, along with others, have contributed to ETFs’ widespread success.”

Vanguard research has also found that investors will be more likely to use ETFs over a comparable mutual fund if no commission is charged. A number of online brokerage platforms has already implemented commission-free trades on a slew of ETF offerings. [Six Popular Commission-Free ETF Trading Platforms]

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