ETF usage differs for investors, planners


By Krystine Lumanta

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Low-cost fees are the top priority for financial advisers when it comes to using exchange-traded funds (ETF), in contrast to investors who listed fees lower in their reasons for using ETFs, according to Investment Trends.

The BetaShares/Investment Trends “November 2013 Exchange-Traded Funds Report” revealed that overall the number one reason investors cited for using ETFs was diversification, followed by access to overseas markets and then low cost.

“The key difference between investors and planners in their usage of ETFs is that it tends to be more about fees for financial planners than investors,” Investment Trends senior analyst Recep Peker told financialobserver.

“Being low cost was the number three reason for investors.

“This comes through when they pick a particular ETF over an equivalent, the key things they gave was that it suited their particular objectives and strategy and provides me with diversification, while low cost was the fifth as the most commonly cited reason for picking an ETF.”

When asked why investors did not use ETFs more, only 3 per cent of the total current investor population said it was due to being expensive, the report said.

“So investors don’t think ETFs are too expensive, in fact, it’s the driver for using them,” Peker said.

In contrast, when it came to financial planners, ETFs offered them a low-cost alternative to other investments, for example, lower cost for exposure to international equities, the report said.

“When we asked planners why they used ETFs, the number one most cited reason was low cost,” Peker said.

“Then when it came to picking individual ETFs over others, low cost was again the number one reason, ahead of diversification.

“Diving deeper into those responses of picking one ETF over another, they said it gives them what they want but at a low cost.”

In addition, the report found 32 per cent of planners said they used ETFs as it brought down fees on the overall portfolio, reflecting the intention to make it cheaper for their clients.

When asked what stopped investors from investing in ETFs or limited them from investing more in ETFs, hidden fees came up as a barrier, it said.

However, only 7 per cent of current ETF investors said they held concerns over hidden fees.

“We tracked investors’ self-assessed level of understanding of ETFs – expert, good, limited or none at all,” Peker said.

“When we look at the barriers for those who said they had limited or no understanding of ETFs, they were about three to four times more likely to state hidden fees, so it’s essentially a knowledge gap due to perceptions that have built from using managed funds, for example, that there will be hidden fees associated.”

The research was conducted from September to December 2013 and was based on responses from 10,421 investors and 734 advisers.

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