With so many investors flocking to exchange traded funds, Vanguard has asked its researchers to find out what’s driving that behavior. The answer, in a nutshell, is that for ETF investors, familiarity breeds contentment.
“Our analysis finds that the decision to buy the ETF share class is largely driven by a set of factors we have dubbed the ‘FACTS’: familiarity, access, costs, trading flexibility and stocks. Foremost among them is familiarity,” wrote Vanguard authors Joel Dickson, Stephen Weber, David Kwon and John Ameriks in a white paper released on Wednesday.
Released on Wednesday, the paper, “Buying on the FACTS: Investors’ choices between ETFs and mutual funds,” notes that investors who have purchased ETFs before are much more likely to do so again the next time they face a decision between a mutual fund and an ETF. (On the same day, Vanguard published a second ETF research paper, “Understanding Synthetic ETFs,” which explains their potential benefits and risks and discusses best practices for synthetic ETF collateral management and disclosures.)
For ETF investors, access is also a key determinant, “as investors must have a brokerage account to buy an ETF, and the lack of one appears to be a significant barrier to entry,” according to the authors, who used client transaction data gathered by Vanguard’s Client Insight team.
Analyzing purchase decisions made by self-directed investors when buying a new investment, Vanguard’s researchers looked at investors who could have chosen either an ETF or a mutual fund to achieve the same exposure, and then examined why a particular choice was made.
Along with familiarity and access, costs play an important role because investors are more likely to choose an ETF over a mutual fund if no commission is charged, if the mutual fund has a purchase fee, or if the ETF offers a lower expense ratio. Trading flexibility in ETFs appeals to investors who prefer a more hands-on approach, says the white paper, and investors are more likely to buy ETFs in a stock fund than in a fixed-income fund.