Exchange traded funds may be efficient, low-cost and easy-to-use investment vehicles, but that does not mean that investors would blindly use the tools without concerns.
E*TRADE Financial Corporate recently conducted its StreetWise quarterly tracking survey of experienced investors and found that over half of investors are most worried about choosing the right ETF, specifically 53% of investors.
According to XTF data, there are now 1,993 exchange traded products from 103 fund sponsors with $2.8 trillion in assets under management. This year along, 40 new funds launched while 18 were delisted.
Around 41% of investors indicated that the complexity of ETFs were a major cause of concern. As the ETF industry continues to expand, fund providers have shifted away from traditional beta-index, capitalization-weighted ETFs toward customized or smart-beta strategies. Consequently, the increasingly complex strategies providers are bringing to market have become a point of concern as investors worry that the funds’ actual performance may not align with expectations.
About 35% of investors indicated that the tracking error or difference between an ETF and its underlying net asset value is also another cause for concern. Most ETFs are index based and passively mirror the performance of a specific underlying index, but some ETFs’ performances may diverge from their net asset value, which can cause unwanted surprises.
“ETFs have experienced extraordinary growth in recent years, allowing investors easy access to virtually any asset class and investing strategy,” Rich Messina, SVP of Investment Products at E*TRADE Financial, said in a note. “With more choices than ever before, it’s no surprise that investors can experience selection fatigue. Before investing in any ETF, investors are wise to research the underlying positions of the ETF, the bid-ask spread, and the market capitalization, which can go a long way in helping to reduce concerns. There are many tools available to help investors.”
Moreover, E*TRADE found that ETF concerns can vary by age demographics. For example, over a third of Millennials are concerned the most that their ETF will be delisted, but only 1 out of 10 Boomers share that concern. This concern may stem from the differing investment styles or ETF strategies that the two groups would favor.
For instance, Millennials are more apt to gravitate toward less traditional ETFs like commodity, style, foreign currency,d derivatives or inverse funds to gain target market exposure.
In contrast, Boomers are more likely to gravitate toward the types of ETFs that can serve as the core position of a retirement portfolio, such as broad U.S. market index and dividend funds.
Meanwhile, Gen Xers favor overseas and smart beta for their fund selection, along with similar interest in mainstream ETFs like U.S. market index and dividend ETFs.
For more information on ETF usage, visit our ETF performance reports category.