ETFs Still Mystify Investors

Sidebar to "Will ETF Flaws Diminish Their Appeal?"

A recent survey by TD Ameritrade found that nearly 20 years after the first ETFs were introduced, investors remain unfamiliar with them. Of the investors TD Ameritrade polled, only 34% said they’d heard of ETFs and fewer than 25% said they had a basic understanding of them. Only 15% said they owned ETFs in their portfolios.

TD Ameritrade recently launched a commission-free ETF Market Center featuring 101 ETFs selected by Morningstar. Don Phillips, president of fund research at Morningstar, agrees that the “basic construct” of an ETF is quite esoteric for many investors. “There are complexities in ETFs that are quite subtle and difficult to grasp,” he says, like the difference between an exchange-traded fund (ETF) and an exchange-traded note (ETN). “With exchange-traded notes, which is what a lot of the commodity offerings are, you end up with a whole host of different concerns because it’s really the entity that’s backing the note and their creditworthiness that’s the key issue,” he explains.

Advisors, too, probably don’t know as much about ETFs as they think they do, Phillips adds. But the good news is that advisors want to become more educated about them. At Morningstar’s first ETF-focused conference, which was held recently, Phillips says he found that the advisors attending the conference were “very different” from the ones who attend Morningstar’s investment conference. Advisors attending the ETF conference “view themselves more as the alpha generator,” he says.

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