Investors Aim to Expand ETF Holdings, Want to Customize: Schwab Study

Exchange-traded fund investors expect the products to comprise a larger part of their holdings in the future, and they show interest in exploring other investments that allow for better portfolio customization, according to a new Schwab Asset Management study.

The report, “ETFs and Beyond,” noted that ETF holders have kept buying through this year’s bear market, high inflation and rising interest rates, and found many non-ETF investors expect to join their ranks eventually.

Eighty percent of ETF investors surveyed named ETFs their vehicle of choice, an increase from 71% in 2020, the firm said. ETFs now account for 33% of ETF investor portfolios, compared with 27% five years ago, and ETF investors expect these products to comprise 40% of their holdings in the next two to five years.

Schwab reported that 93% of ETF investors expect to buy ETFs in the next two years, while 41% of non-ETF investors indicated they’re likely to do so as well.

“ETF investors have continued adding ETFs to their portfolios at a strong clip over the last 10-plus years. This speaks to the strengths of these products and their ability to deliver exposures, cost effectiveness, tradability and tax efficiency investors seek through multiple market cycles,” David Botset, Schwab Asset Management managing director, head of Equity Product Management and Innovation, said in a statement.

“Sustained interest among current ETF investors combined with interest from those who have never invested in ETFs is a very promising sign for more growth ahead,” he said.

Roughly half of ETF investor respondents said this year’s market disruptions didn’t affect their ETF investing, while nearly a third invested more and a fifth decreased their ETF investments, according to the survey.

The study also found that 64% of ETF investors want greater ability to personalize their portfolios and 67% think it’s important to have more control over their investments.

More than a third of ETF investors indicated they’re very likely to invest more next year in companies and funds aligned with their personal values while 29% expect to divest from companies that don’t line up with their beliefs, according to Schwab. One third of ETF investors said they’ll very likely invest more in themed vehicles.

A third of ETF investors also indicated they’re very likely to invest in direct indexing, one of the fastest-growing personalized investment areas, in the next five years, the survey found.

“While their appetite for ETFs remains robust, ETF investors are also interested in exploring ways to tailor their investments to their personal situations, goals and preferences,” Botset said. “For some, personalization goals can be met by investing in ETFs that align with their preferences, but for others, new solutions such as direct indexing may offer a more refined approach to meeting their investment and personalization objectives.”

Millennials have a greater percentage of their portfolios invested in ETFs than investors in older generations, expect them to account for more of their holdings in the next five years and are more interested in personalization than investors from older generations, the study found.

Schwab commissioned Logica Research to conduct an online survey of 2,000 individual investors from ages 25 to 75 with at least $25,000 in investable assets, 1,000 of whom have bought or sold ETFs in the past two years and 1,000 of whom have not.