Investors Struggle to Choose the Right ETF

U.S. market index and dividend funds generate greatest interest among investors

The stunning growth of exchange-traded funds gives investors wide access to assets classes and investing strategies, but many investors are daunted by deciding which one to buy.

Fifty-three percent of investors in a new study by E-Trade Financial cited choosing the right ETF as their biggest challenge.

Selection will not get easier, as more than 100 new funds come to market every year.

“With more choices than ever before, it’s no surprise that investors can experience selection fatigue,” Rich Messina, E-Trade’s senior vice president of investment products, said in a statement.

That is not investors’ only concern. As providers bring harder-to-understand strategies to market, 41% of investors in the study worried that their fund would not perform as expected because its strategy was more complex than it appeared.

And 35% fretted about the possibility of an unwanted surprise if their ETF’s returns lagged that of the specific index it was designed to mirror.

“Before investing in any ETF, investors are wise to research the underlying positions of the ETF, the bid-ask spread, and the market capitalization, which can go a long way in helping to reduce concerns,” Messina said.

E-Trade’s ETF Screener allows investors to evaluate and compare just about every ETF on the market, according to the statement. It sorts by rating, category, characteristics and commission-free status.

Although complex strategies can stump prospective investors, some observers see innovative investment strategies as a chief attribute of the ETF industry.

The E-Trade survey was conducted in early January among an online U.S. sample of 904 self-directed active investors who manage at least $10,000 in an online brokerage account.

Concerns about ETFs varied by the investor's age, the study found.

Boomers in the survey were most likely to gravitate to the types of ETFs that provide the bedrock of a retirement portfolio, such as U.S. market index and dividend funds.

It is not surprising then, given the critical role these funds can play in a retiree’s investment mix, that 64% of boomers were sensitive about picking the right ones, compared with 52% of Gen Xers and 43% of millennials.

Thirty-six percent of millennials worried about their ETFs being delisted or liquidated, something that concerned 21% of Gen Xers and just 10% of boomers.

Still, this concern was not enough to dissuade millennials from buying less traditional ETFs, such as commodity, style, foreign currency, derivative or inverse funds, the study found.

Following are the types of ETFs in which survey respondents were most interested:

  • U.S. market index, 48%
  • Dividend, 40%
  • Sector- and industry-specific, 28%
  • Foreign market index, 19%
  • Bond, 18%
  • Commodity, 18%
  • Style or market cap, 17%
  • Actively managed or smart beta, 13%
  • Leveraged, 10%
  • Foreign currency, 10%
  • Derivative, 10%
  • Inverse, 8%
  • Exchange-traded notes, 7%

A recent report said active and smart beta ETFs set new asset records in February.

--- Check out Thou Shalt Not Buy Biblically Responsible ETFs on ThinkAdvisor.

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