While the investors who've put their retirement funds in ETFs believe the tool is geared for the long haul, many admit they're financial newbies who need some additional education to make better decisions.
The 2012 ETF Investor Study issued by Charles Schwab shows optimism and enthusiasm among 1,000 individual investors, though many say they'd like broader financial knowledge to help with future investment decisions.
More than 80 percent of those polled told Schwab they believe ETFs are "here to stay," with only 7 percent suggesting that they're a passing fad. A majority, however, admitted that they choose ETF investments based on cost (60 percent) and the performance history of the fund (57 percent).
Most importantly, when asked about their overall understanding of ETFs, almost half of investors say they would consider themselves novices. And 63 percent of those simply considering ETF investments described themselves as "novice" financial experts.
"It's very exciting to see investors rally enthusiastically around ETFs as an essential part of their investing toolbox - but now we need to make sure that their knowledge about the use of ETFs fully matures as well," said, Beth Flynn, Schwab's vice president of ETF platform management.
Investors in the study signaled that their usage of ETFs will broaden in the future. Forty-one percent plan to invest more in ETFs in the coming year, with sector and equity funds topping the list as the types of ETFs under consideration. Energy, healthcare and technology are the sector funds investors are most interested in buying.
Investor enthusiasm for ETFs carries through to retirement accounts. Of those surveyed who have an employer-sponsored retirement account, 55 percent want the ability to access ETFs through them. Only 12 percent said they can select ETFs through their employer’s retirement account now.
Cost is King in the ETF Buying Decision
Cost is the number one factor investors look at when selecting ETFs, according to the study. Respondents also cited reputation of the fund sponsor and performance history of the ETF as the other two extremely important criteria they consider in making their investment decision.
What matters most to investors about ETF costs? Investors surveyed say they pay most attention to expense ratios, followed by trade commissions. Thirty-eight percent believe that the ability to trade ETFs commission-free is important, and of this group, 40 percent call it "most important" while the remaining 60 percent say this ability is "very important." An additional 46 percent say commission-free trades are somewhat important, but not the only factor they consider.
ETF Knowledge is Improving, but There is Room to Grow
While 39 percent claim to be better versed in ETFs than they were last year, there are plenty of investors who still say they do not know enough to make that initial ETF investment. Fifty-three percent of investors who are considering but have not yet purchased an ETF claim that their lack of understanding is the main reason they have not done so. Although 57 percent of those who own ETFs rate their understanding of the products at the intermediate level, a full 63 percent of those considering ETFs classify their knowledge base as "novice".
The five ETF issues that investors want to know more about are:
- Tax implications of ETFs
- How to best use ETFs
- Risks associated with ETFs
- How to best use sophisticated ETFs
- ETF costs
The study also found that investors were most curious about increasing their understanding of sector ETFs, followed by fixed income and equity ETFs.
“We’ve made some gains in educating investors, but clearly there is still room to grow,” said Flynn.