Clients are eager to use ETFs, but they don't understand them

Exchange-traded funds are in the right place at the right time, according to the results of an investor survey conducted by The Charles Schwab Corp. The research, conducted last month, found that 44% of more than 1,000 individual-investor respondents plan to increase their investment in ETFs over the next 12 months. The survey targeted investors with at least $25,000 in investible assets and a familiarity with ETFs. Just 2% of the respondents said that they plan to decrease their ETF investments. The findings were released Thursday morning in Chicago at the start of the Morningstar Inc. ETF Invest Conference. According to the research, the boom in interest is driven in part by a distinct set of benefits unique to the product. ETF investors identified the biggest benefit as the ability to trade like stocks, while those considering ETFs cited diversification as a top benefit. The survey also uncovered gaps and potential pitfalls that the ETF industry likely will need to address. At the top of the list: 46% of respondents described themselves as “ETF novices.” Indeed, a quarter of all respondents confessed that they don't fully understand the ETF cost structure or how to use them most effectively as part of an investment strategy. Just 8% of ETF owners said that they consider themselves experts on ETFs, and they described the top challenge as being too many choices. “Individual investors are attracted to the efficiency and flexibility of ETFs, but many do not have a solid grasp on how they work,” said Beth Flynn, vice president of ETF platform management at Schwab. According to the survey, cost is the most important factor to investors when choosing an ETF, followed by performance history and reputation of the ETF sponsor firm. “Individual investors are simply not satisfied with their own knowledge of ETFs, and want to learn more,” Ms. Flynn said. “This combination of high investor demand for ETFs with low understanding makes an obvious case for more tools and better education across the investment spectrum.” Email Jeff Benjamin at jbenjamin@investmentnews.com