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January 19, 2017

Behind the Record Growth of ETFs

By Martin Small, BlackRock
On the heels of a record year for exchange traded funds (ETFs), it’s clear that these are no longer niche investments. Today, one in four U.S. investors owns ETFs, and more than 80% of financial advisors manage portfolios with at least some ETFs, according to the BlackRock ETF Pulse survey of retail investors. That growth is likely to continue.
Who is actually driving that growth? That’s the question we set out to answer in our survey: not just the “how many” of ETFs, but also the “who, how and why.”

Young, confident and engaged

One thing we learned from Pulse is that ETF investors may share some unique characteristics and attitudes, among them:
Millennials are leading the charge in ownership. One-third of Americans age 21 to 35 invest in ETFs, versus roughly one-quarter each for Gen Xers, Baby Boomers and Silvers.
ETF owners are generally more confident in their ability to make the right investment decisions (85% vs. 72% for non-ETF owners) and optimistic about their financial futures. We see it in their asset allocation: They hold just 17% of their portfolios in cash on average, versus 29% for non-owners.
Are ETFs a trading vehicle or buy-and-hold investment? Most investors (64%) view them for both. Those who already own ETFs tend to lean toward buy-and-hold: More than a third have held their ETFs for six years or more, for an average holding period of five years. See the chart below.

A full 90% of ETF owners expect to add to their current holdings in the next 12 months, and 40% of non-owners plan to make their first investments in the coming year. What’s particularly encouraging is that these purchases will be largely funded with cash savings (46%) and systematic income investments (21%). That’s new money being put to work in the markets, helping investors target the growth they need to meet their goals.
The versatility of ETFs means that investors are putting them to work in a variety of ways, from increasing diversification (53%) to tracking large core market indexes (43%) to replacing mutual funds (44%) and individual stocks (42%) within their portfolios.
Finally, the “active vs. passive” debate isn’t a debate at all. Most respondents (47%) have no particular bias toward active or passive. And nearly 9 in 10 think it’s a good idea to own both index ETFs and active mutual funds.

More findings

The survey also found that there still are some big gaps in knowledge about ETFs, such as the breadth of choices in bonds, international markets and smart beta; and too few people are aware of features like tax efficiency. Fortunately, most people are curious to learn more about these and other topics, whether it’s from their financial advisor, financial media or online research.
That curiosity is a good thing. In an age when more and more Americans are making ETFs an essential part of their financial toolkits, it’s time to make them part of the conversation, too.
Courtesy of Martin Small is the Head of U.S. iShares and a regular contributor to The BlackRock Blog. (EconMatters archive here)  
About the survey
The BlackRock 2016 U.S. ETF Pulse survey was conducted from September 12–26, 2016, by TNS, an independent research company. The survey interviewed over 1,000 individual investors and 400 financial advisors, from nationally representative online samples of household financial savings/investment decision makers age 21–75, with $100K+ in investable assets and aware of ETFs; and financial advisors age 21–75 with $25MM+ in assets under management.
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Diversification and asset allocation may not protect against market risk or loss of principal. This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). ©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. iS-20012
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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