ETF investors care about cost. A lot. They care about cost more than brand name, more than exposure—even more than the return of the fund in which they've invested.
That's one of the more eye-popping conclusions found in Charles Schwab's 2018 ETF Investor Study, an online survey of 1,500 ETF investors released Tuesday.
The annual survey offers a wealth of insights into ETF investor behavior, including the differences in how the genders and generations employ ETFs. Participants in the study ranged between the ages of 25 and 75, with at least $25,000 in investable assets.
Below are our five main takeaways from the survey:
It All Comes Back To Cost
By far, the most important factor to respondents when choosing a fund was its cost. Investors cared about an ETF's expense ratios, commissions and spreads more than they cared about its exposure, brand name, liquidity—yes, even the fund's historical returns.
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That lines up well with the results of ETF.com's most recent advisor survey, in which advisors ranked expense ratio as their prime consideration when choosing ETFs, above other factors like index, performance and spreads.
Intriguingly, ETF investors also appear to be concerned about per-trade cost, in addition to cost of ownership. According to the survey, 64% of investors considered the ability to trade ETFs commission free as "most" or "very" important. Also, a growing number of investors (31%, up from 23% in 2017) said they would switch their account to a brokerage firm that offered commission-free ETFs.
Millennials Are ETF True Believers
Unsurprisingly, ETFs are the preferred vehicle for 72% of ETF investors, and truth be told, we'd probably question a survey of ETF investors that didn't find most of them liked using ETFs. What is remarkable here, though, is the fervor that ETFs inspire in their investors—especially younger ones.
A whopping 91% of millennials (age 25-37) agreed that ETFs were their investment vehicle of choice, compared with 80% of Gen Xers (age 38-53), 54% of boomers (age 54-72) and 30% of matures (over age 73):
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Millennials also hold more ETFs in their portfolio than any other cohort. On average, millennials held 41.9% of their portfolio in ETFs, compared with 38.9% for Gen Xers, 23.2% for boomers and 17.4% for matures.
ETF's popularity with younger investors comes back to—what else?—cost, said Kari Droller, vice president of Third Party Mutual Funds and ETFs at Charles Schwab: "They're just a very cost-conscious generation."
Millennials have also "grown up with ETFs," she added. "When they think investing, they think ETFs."
However, millennials may also be gravitating to ETFs simply because they can. Unlike boomers or matures, most millennials don't have significant existing assets tied up in mutual funds or other instruments that would result in decades' worth of capital gains should they be converted to ETFs.
"More mature investors have more mature investment portfolios, and so the tax implications could be a big factor," said Droller.
That's not to say older investors are simply staying put in tax-inefficient instruments, however. Fifty percent of boomers and 58% of matures said they'd replaced at least some of their individual securities with ETFs. (Meanwhile, 64% of millennials reported the same.)
ETF Investors Welcome Volatility's Return
ETF investors apparently aren't spooked by the return of volatility to the U.S. equity market. Instead, they tend to see it as an opportunity—mostly to trade more ETFs. Sixty percent of all investors surveyed said they bought and sold ETFs more frequently during periods of volatility, while two-thirds (67%) said they planned to allocate more money, not less, to ETFs during volatile times.
"The return to market volatility in 2018 did not dampen interest in ETFs for investors—in fact, quite the opposite," said Droller.
In particular, millennial ETF investors tended to be more active during volatile periods. Fully 95% of millennials said ETFs "provided them with the flexibility they needed to react to short-term swings in the market." Another 92% said they became more interested in smart-beta ETFs during periods of market volatility, a trend that also showed up in the behavior of other generations.
Apart from swings in market volatility, however, ETF investors don't appear to be particularly event-driven in their investing. Though more than a third of respondents said they'd put more money into ETFs in response to interest rate increases and the tax reform package, more than half of investors said they'd kept their allocations the same after these two events (53% and 54%, respectively).
Men & Women Invest In ETFs The Same
Much has been written about how women tend to be more conservative investors, while men tend to take greater risks, but that didn't show up in the results here. There was little difference between the genders in how much of their portfolio was invested in ETFs—about a third for both—or in their plans to increase allocation to ETFs (about a third said they would).
"We found that men and women had very similar engagement with ETFs," said Droller. "The main difference that was found was that men were more likely to describe themselves as 'experienced' with ETFs than women were."
Men tended to act on that belief, too: 51% of male respondents said they selected most of their ETFs "by myself," whereas women were more likely to report using the services of an advisor, a robo advisor or a portfolio-building tool.
Charts courtesy of Charles Schwab, 2018 ETF Investor Study
Most ETF Investors Are Self-Directed
The vast majority of ETF investors do not rely on an advisor to pick ETFs for them. Instead, they turn to robo advisors (8%), portfolio-building tools (17%) or their own best judgment (46%) over the judgment of advisors (29%).
Generational gaps did emerge, however. Mature investors were the most likely to rely on advisors to make their ETF selections (48%), while millennials and Gen Xers were least likely (22%).
Instead, the younger two cohorts were more likely to report using technology to select investments, whether that was a robo advisor or a portfolio-building tool (38% of millennials and 31% of Gen Xers).
"Technology is really fueling the growth of ETFs," said Droller, adding that robo advisories and portfolio builder tools tend to offer mostly ETFs as their built-in investment choices. "So as younger investors engage with those platforms, it drives exposure to ETFs."
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