Investor Insights: Why you should embrace ETFs

Do you own an ETF within your portfolio? Investors who do not hold ETFs may feel that these products are not for people like them. But there is no reason why an investor must be a sophisticated trader to hold ETFs, and indeed a preference for buying and holding funds should not preclude investment in ETFs.

Those are a couple of the findings of a new report on ETFs from the Investment Association (IA), which is calling on the industry to do more to improve education around and accessibility to ETFs.

It’s a big report with lots of survey stats and charts. Here’s a rundown of some interesting findings which might be relevant to investors.

ETF awareness growing

The good news is that appetite for ETFs amongst investors is increasing, particularly among younger investors. However, there is clearly knowledge gulf that is holding back wider adoption.

In fact, the IA specifies that younger, male and higher income investors are currently driving ETF adoption. Over 2 in 5 (41%) ETF investors are aged 18-34, and over two-thirds (68%) are male, significantly above the 56% of men in the overall investor sample, it says.

Key reasons to invest in ETFs

The respondents to the IA survey highlighted a mix of low costs, diversification and access to specific index performance as among the key reasons to invest in ETFs.

ETF investors also value features specific to ETF structures like exposure to specific investment themes/markets, which are harder to achieve by investing through broader index trackers.

Cost: The most commonly cited reasons for investing in ETFs are diversification and low fees. In the survey, 46% of ETF investors said they invest in them for diversification of investments and an equal 46% said “low fees and cost-effectiveness” is a major reason for holding ETFs. 

Access to Specific Markets or Themes: ETF investors are also keen to invest in specific corners of the market - 32% invest in ETFs to get exposure to specific investment themes (like technology, clean energy and AI), while another 33% cited “access to specific markets, industries, or sectors”.

Diversification: Diversification is one of the obvious benefits and therefore the reasons behind investing in ETFs. The IA research claims the typical ETF investor’s portfolio is diverse - 47% of ETF investors hold investment trusts/companies, compared with only 21% of investors that do not hold them. And 46% of ETF investors in the survey said they invest in ETFs for diversification of investments.

Tax: 74% of ETF investors have a stocks and shares ISA, compared with 16% of all adults and 44% of the investors who don’t hold ETFs. The IA notes that “ETF investors are savvy about making best use of ISA contribution rates to avoid having to pay tax on capital gains or income”.

Improving access to ETFs

Yet, the majority of investors are still not using ETFs.

The IA seeks to find out why and it throws up some interesting evidence.

Low awareness: Among investors who do not currently hold ETFs, 21% had never heard of an ETF before the survey. A further 28% had heard of ETFs but “don’t know anything about them,” and 27% said they’ve heard a lot about the product yet “don’t exactly know what it is”.

Hardly surprising therefore that the main reason for not investing in ETFs was “not knowing enough about them.”  There was also considerable uncertainty around how to evaluate or compare ETFs, which point to the same problem: lack of understanding. It’s particularly noteworthy that many ETFs are just straightforward index trackers.

“Since many ETFs simply track indices, their performance should be relatively transparent as their investment objective is to mirror the performance of the index/ market that they track,” says the IA.

The risk and complexity of investing in ETFs was cited by about a fifth of respondents who don’t already own them. As the IA points out, these perceptions may not reflect reality as ETFs “can actually reduce risk through diversification”.

Among people who already own an ETF, limited choice on platforms was a barrier to entry. Over half (55%) of ETF investors in the survey said they would increase their ETF holdings if more options were available on their main investment platform.

Saxo offers over 7,400 ETFs on its platform across Equities, Bonds and Money Market funds.

Our Most Popular ETFs at Saxo

Here’s some of the most popular ETFs bought by Saxo clients over the last three months.

Vanguard S&P 500 Dist UCITS ETF (VUSA) - This fund seeks to track the performance of the S&P 500 index, a widely recognised benchmark of U.S. stock market performance that is comprised of the stocks of large U.S. companies. Alternatives to this include the Xtrackers S&P 500 UCITS ETF (XDPG).

Another popular index tracker is the Vanguard FTSE 100 UCITS ETF - (VUKE) - which tracks the performance of the FTSE 100.

Among Sectoral ETFs, the rise in gold prices has attracted interest in the VanEck Gold Miners UCITS ETF (GDGB), which tracks the price and yield performance of the NYSE Arca Gold Miners Index. A similar fund is BlackRock’s iShares Gold Producers UCITS ETF (IAUP), also popular, which reflects the return of the S&P Commodity Producers Gold Index.

A popular Thematic investment at the moment is AI, which can be accessed by the WisdomTree Artificial Intelligence USD UCITS ETF (INTL). This fund tracks the NASDAQ CTA Artificial Intelligence Index.

Check our list of last month's most popular ETFs.