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Schwab ETF Study: Cost Is King

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When selecting exchange traded funds, individual investors’ No. 1 criteria is cost, with expense ratios listed as most important and then trade commissions, according to a Charles Schwab ETF investor study released last Thursday.

After cost, the most important factors are the fund sponsor’s reputation and the ETF’s performance history, according to Schwab’s online survey of more than 1,000 individual investors between the ages of 25 and 75 with at least $25,000 in investable assets and some familiarity with ETFs.

While the survey results show that cost is king, education is lagging. A large majority of respondents, 81%, said ETFs are “here to stay,” but nearly half, or 45%, called themselves novices when it came to understanding exchange traded funds and notes. A smaller number, 39%, asserted that they know more about ETFs than they did a year ago.

“It’s very exciting to see investors rally enthusiastically around ETFs as an essential part of their investing toolbox, but now we need to make sure that their knowledge about the use of ETFs fully matures as well,” said Beth Flynn, vice president of ETF platform management at Charles Schwab, in a statement. “Most investors generally understand that ETFs tend to offer diversification at a low cost, but many still need more insight and education on how best to use them, the risks involved and potential tax implications.”

Forty-one percent of survey respondents plan to invest more in ETFs in the coming year, with sector and equity funds topping their list of funds under consideration. The most popular sector funds are in energy, health care and technology.

In other news from last Thursday that shows how ETFs have come to occupy a larger share of the fund space, Morningstar announced the winners of a new awards program for U.S. ETFs and ETNs as well as ETF providers. Named at the Morningstar ETF Invest 2012 conference in Chicago, the 37 winners, all at least three years old, were chosen from among a pool of 400 ETFs based on performance and cost.

Schwab in March 2011 released an ETF “Select List” tool designed to help retail investors find suitable low-cost funds for their portfolios.

State Street Global Advisors’ latest ETF Snapshot report for September shows that U.S. ETF assets totaled $1.3 trillion as of Sept. 30, up 22.7% year to date. In September, investors added $37 billion more to ETFs than they withdrew, as emerging markets and large cap ETFs attracted $4 billion and $10 billion of inflows respectively. This marked a reversal from August, when large cap ETFs experienced outflows of $4.4 billion. Year to date, ETFs have attracted over $130 billion of inflows, up from $77.2 billion inflows as of September 2011, according to State Street, whose SPDR funds comprise a large share of the ETF market.

Read How John Bogle Really Sees ETFs at AdvisorOne.