Exchange traded funds are an attractive investment option, but it is more attractive to investors who understand how they differ from mutual funds.
Mutual funds remain more attractive as an investment option than ETFs, according to the Spectrem study of wealthy investors ETF Investing by the HNW, but ETFS are growing rapidly among the investment community. Fewer costs and freer transaction opportunities make ETFs a new choice especially for high net worth investors.
Exchange Traded Funds are similar to mutual funds because they are a collection of assets, but they are different in that they are traded throughout the market day like a stock rather than at the end of the business day as mutual funds are. That makes ETFs more volatile and possibly more lucrative.
The Spectrem study examined three different wealth segments: Mass Affluent ($100,000 to $1 million not including primary residence), Millionaire ($1 million to $5 million NIPR) and Ultra High Net Worth $5 million to $25 million NIPR). Only 28 percent of all investors studied owned ETFs, but that number ranges depending on wealth and understanding of the products.
Exchange Traded Funds are particularly popular with Ultra High Net Worth investors, with 47 percent of those studied owning ETFs. A similar number (45 percent) of survey respondents who classify themselves as knowledgeable about investments owned ETFs.
The other end of the study was the Mass Affluent, of which only 15 percent own ETFs. Only 13 percent of those who are not very knowledgeable about investment products own ETFs.
Risk is another factor. Because ETFs are a bit more volatile, they attract the more aggressive investor more than the more conservative one.
The study indicated ETFs are chosen because of the investment record of the fund seller (44 percent of UHNW) or because an investment advisor suggested it (44 percent).
Some investors own both ETFs and Mutual Funds, and most of them like to invest in that manner. Forty-seven percent of investors said they preferred having both products in their portfolio. While 30 percent preferred mutual funds and 24 percent said they preferred ETFs. Almost two-thirds of investors said they would be likely to move funds from mutual funds into ETFs.