Survey shows ETF boom, advisors question focus on cost

BlackRock predicts time when half of US investors will own an ETF

Survey shows ETF boom, advisors question focus on cost

BlackRock Inc believes we are just two years away from half of US investors owning an ETF.

The company’s latest ETF Pulse Survey revealed one-third currently has an ETF in their portfolio, up from a quarter last year.

However, Canadian advisors warned that the clamour to invest in these low-cost, index-tracking funds risks overlooking the value of expert management and guidance.

According to the survey, millennials are leading the way in ETF ownership with 42%, up 9%, although it was the older silvers who made the biggest move, almost doubling their adoption from 22% to 37%. Gen Xers (29% to 26%) and baby boomers (27% to 24%) were both down.

Martin Small, head of US and Canada iShares at BlackRock, in a note to clients, compared the impact of ETFs on investing to that of the telephone or internet on society.

He said: “Another transformative technology is catalyzing change. More and more people are choosing ETFs to actively pursue the goals that matter most to them, by tapping into markets and strategies that were once available to only the most deep-pocketed professionals.”

The leading strategy when using ETFs was diversification (44%) and when asked to name their top-10 benefits for choosing the investment vehicle, 41% said low management fees were the reason.

Mark Parlee, senior wealth advisor at IPC Securities Corp, said the increased interest from silvers was not a surprise given the affordability. He uses ETFs largely on the fixed-income side and in speciality markets and said they are a nice way to get diversification.

However, he said they need to be used properly as part of an investor’s overall strategy and that cheap does not always mean good.

He said: “There is a danger of forsaking good, prudent, advice and guidance for the sake of cost. That’s what is getting lost in the discussion these days. Everyone’s focused on the cost side but not on the advice and guidance side.

“That’s with the millennials. My daughters are under 30, and they obviously come to me, but at the same time their friends are all using the robo advisor and stuff like that because you don’t have to talk to anybody and they can open an account on their phone.

“Everything is driven by cost and at some point, like my grandma said, there’s going to be a comeuppance. You see these things take off when overconfidence comes in. You know when you’re getting to the top of the cycle when you see people think, I can do it myself, and that’s one of the indicators you look for.”

Sean Harrell, partner and senior advisor at Howe, Harrell & Associates, believes lines are being blurred in the ETF space because of the sheer number of different products out there. He fears it has got out of control and questioned whether the rate of growth is sustainable.

Harrell said if someone is looking for a core, fixed-income holding with a super-low fee then he will use a suitable ETF for part of the portfolio, and round it off with mutual funds and other pools. But he warned against this obsession with going cheap.

He said: “For the past 10 years, if you had put money in anything it would have gone up, so I think people are getting a little complacent; they aren’t doing their homework all that much. They are maybe letting the tail wag the dog a bit in terms of fees. You ask someone about buying something in life, do you want to buy the cheapest or do you want to buy something better than what the cheapest is?

“Cheap isn’t always better but it seems to be the mentality with investments right now and there needs to be a spark for people to realise you get what you pay for.”

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