As ETF Adoption Grows, Go Beyond Costs

By Todd Rosenbluth, CFRA

Many investors have shifted or plan to shift their portfolios to ETFs, away from individual securities — evaluating potential ETFs based on expense ratio, other cost factors and the product’s ability to track its index. However, CFRA has concerns that if the investors’ homework ends there they may end up disappointed.

Charles Schwab (SCHW 57 *****) published the results of an online study of 1,500 ETF investors conducted by Koski Research. Three-quarters of these investors selected ETFs either solo or with the help of an advisor, with the self-reported average of investable assets amounting to approximately $800,000.

Two of the key takeaways were related to the usage of ETFs as a replacement for individual securities and the focus on costs above all else.

Approximately one-third of respondents have replaced all individual securities with ETFs, led by millennials (56%) and Gen X (41%) investors. Meanwhile, an additional 20% of all respondents are considering shifting to an all ETF portfolio.

Rather than buying dividend-paying stocks, such as Intel (INTC 55 ****) and Home Depot (HD 200 ****), investors in Schwab US Dividend Equity ETF (SCHD 51 Overweight) hold a combined 10% of assets in these stocks, but also Pfizer (PFE 36 ***), Procter & Gamble (PG 76 ****) and Union Pacific (UNP 144 ***), providing both stock and sector diversification.

Meanwhile, when considering an ETF such as SCHD or other products, respondents favored a cost focus rather than consideration of the ETF’s trading volume, historical performance or access/exposure to a specific part of the market.

Related – Paul Tudor Jones: Next Recession will be ‘Really Frightening’ 

The two highest priority evaluation selections made by those ETF investors surveyed were low expense ratio and total cost (defined in the survey as commissions, expense ratio and bid/ask spread). Both of these were either extremely important or somewhat important to 95% of the respondents, followed by 94% for how well the ETF tracks its index.

Meanwhile, 64% respondents answered the ability to trade ETFs without commission or fees as the most important or a very important factor for choosing a brokerage firm. Schwab, along with TD Ameritrade Holding (AMTD 60 ***), E*Trade Financial (ETFC 65 ****) and other brokerage firms offer a select list of ETFs that can be bought and sold without commissions.

The Impact of Focusing on ETF Costs

Using U.S. dividend-focused ETFs on Schwab’s commission-free platform, let’s better understand the impact of focusing solely on costs. CFRA’s forward-looking analysis provides a more complete look at the offering. An ETF’s expense ratio and bid/ask spread are combined with technical and holdings analysis to generate CFRA’s overall ETF ranking.