There were not too many surprises in the first results from the Morningstar ETF Centre survey, but that may well have been the best news of all. Both professional and individual investors like the predictable portfolios and new asset classes offered by ETFs, but love the low costs. Most current ETF investors responding to our survey were not using them for fast-trading, risky bets, but instead as longer-term allocations to overweight a specific sector, country, or inflation protection.
Our survey captured a broad range of investors interested in or already investing via ETFs. Out of 1,021 total responses, 871 came from individual investors while 150 came from professional investors, mostly advisers. Survey respondents were roughly split between those who have already invested in ETFs, and those who were still looking into this new investment vehicle. Overall, the number of individual investors and advisers across Europe who use ETFs is still extremely low, so this fifty-fifty split no doubt reflects the massive skew of visitors to our ETF Centre towards those investing or considering investing in these vehicles. But this also meant that we got a diverse set of views from both veteran users and those just dipping a toe into the investment class.
Exchange-traded funds are still quite a new investment vehicle in Europe, and most financial media coverage has been woefully incomplete, so we were not surprised to see that those investors still uncertain about using ETFs in their portfolio desired more information. Of professional investors who are unsure whether they want to invest in ETFs, 67% cited a lack of information about exchange-traded funds as the primary reason for their caution. Among individual investors, it was an incredible 77%. The number of investors with concerns such as brokerage fees, counterparty risk, or preferring active management paled in comparison.
As expected, low costs attracted the most attention to exchange-traded funds, with 62% of current ETF investors citing this as a “very important” attribute to their investment decision and another 29% considering it “important”. Visitors who had not yet invested in ETFs also considered costs crucial, with 92% considering low cost to be either a “very important” or “important” attribute of these funds. Current and prospective investors also like the predictability of passive ETF portfolios and the ability to invest in alternative asset classes like currencies and commodities. Intraday liquidity was considered “important” or “very important” by 61% of current ETF investors, but that was still a lower percentage than for the aforementioned attributes.
Although the possibility of shorting ETFs intrigues some adventurous investors, an incredible 65% of professional investors who actually use ETFs in their portfolio consider the ability to short to be unimportant or of little import. Individual investors were slightly more keen, with 25% considering the ability to short as “important” or “very important” and a smaller 57% believing it to be unimportant or of little importance. This lack of enthusiasm for shorting among actual ETF investors probably reflects the difficulty of shorting these funds in Europe due to the lack of a comprehensive source for borrowing shares. However, it also adds to the picture of exchange-traded funds used less as instruments for free-wheeling, aggressive strategies and more as low-cost building blocks for long-term portfolios.
Adding to this relatively staid picture were the responses to our questions about which type of investments respondents held via ETFs and how often they expect to trade. The favourite investment is traditional broad equity indices, followed closely by country-specific and sector-specific equities. Commodities, currencies, and other exotic asset classes combined as another frequent holding. As for trading frequency, two-thirds of ETF investors expected to only trade occasionally for rebalancing purposes or even less often!
Recent coverage of synthetic, or swap-based, ETFs versus their more traditional physical replication counterparts seems to have made an impression. Only one-fifth of survey respondents were unfamiliar with the distinction, and three-fifths of investors considered it a “somewhat important” or “very important” consideration in ETF selection. Three-quarters of respondents preferred physical replication, which actually holds the underlying index securities in the fund’s trust. However, only about a third of survey takers were “very concerned” with counterparty risk, and most were willing to use swap-based ETFs in return for lower expense ratios or better liquidity.
The Morningstar ETF Survey was conducted from March 4, 2010 to July 15, 2010 and attracted responses from 1,021 professional and individual investors. The second ETF survey is now open and interested individuals can participate via the Morningstar ETF Centre. Download a PDF version of the results here.
