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Market Extra: Here’s where ETF investors plan to put money to work in coming year – and how their generational attitudes shake out, Schwab study finds

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Many investors in exchange-traded funds are unrattled by market volatility in 2022 and are planning to take risks in areas such as U.S. equity and cryptocurrency ETFs in the coming year, according to a study by Charles Schwab Corp.’s asset management arm. 

About half of ETF investors did not alter their portfolios due to market disruptions including soaring inflation, rising interest rates, Russia’s invasion of Ukraine and market volatility, while nearly one-third put more money into exchange-traded funds as a result, Schwab Asset Management said in its annual probe of the ETF market. The survey for its study, conducted June 13 – June 28, covered individual investors with at least $25,000 in investable assets. 

The top types of funds that ETF investors plan to buy in the year ahead include U.S. equities, real assets, fixed income and cryptocurrencies. Almost half of those surveyed favored crypto.

CHARLES SCHWAB ETFS AND BEYOND STUDY

“ETF investors tend to be a little bit more on the leading edge of the types of strategies that they’re investing in,” said David Botset, head of equity product management and innovation at Schwab Asset Management, in a phone interview. They’re expressing “a willingness to look at other strategies that they may have not used in the past.”

ETFs are becoming a larger portion of portfolios, with newer categories such as actively managed, thematic and environmental, social and governance criteria “gaining steam” as investors look to personalize their holdings, Schwab found. 

Among specialty ETFs, the Schwab study shows that dividend, long-short, leveraged and actively managed funds are expected to be the most popular over the next year.

CHARLES SCHWAB ETFS AND BEYOND STUDY

“There are far more options available” today among actively-managed ETFs versus a few years ago, although passive, index-based strategies still dominate, said Botset. He said investors are increasingly considering active ETFs as an alternative to actively-managed mutual funds.

Thematic ETFs, meanwhile, are a way for investors to personalize their investments while capturing trends that may span across sectors, said Botset. For example, the blockchain technology underlying cryptocurrencies has a “wide potential array” of uses, he said, pointing to discussions around using it for records in the medical industry or to share college transcripts.

Read: Stocks have rallied, but July ETF buying showed ‘lack of conviction’ as thematic funds bled

The Schwab Crypto Thematic ETF
STCE,
-4.70%
,
which began trading Aug. 4, provides exposure to companies that may benefit from the development or use of cryptocurrencies and other digital assets. Shares of the fund jumped 1.3% Monday, bringing its gain so far this month to 8.5%. Still, the ETF remained down around 4% since its inception, FactSet data show.

Schwab also probed the attitudes of different generations of ETF investors. 

Millennials are more interested in aligning their investments with their personal beliefs and values, and more inclined to further personalize their portfolios in 2023, the survey found.

CHARLES SCHWAB ETFS AND BEYOND STUDY

Read: ‘They’re making this a battle’: ESG is a slice of ETF industry that’s under fire

ETFs, which trade like a stock and typically provide exposure to a basket of securities, are becoming a larger part of investment portfolios. 

Schwab’s study shows that ETFs now make up 33% of portfolios, up from 27% five years ago. Surveyed ETF investors expect that portion will rise to 40% in the next five years. 

Investors like the fact that they can easily buy and sell ETFs as they seek to diversify their portfolios, along with their low cost and tax efficiency, said Botset. Total cost remains the top factor that ETF investors consider “extremely important” when selecting a fund, Schwab found.

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