Investors Extending Love of ETFs, According to Schwab Survey

As of Sept. 21, the S&P 500 is down 20.54% year-to-date, meaning the benchmark domestic equity gauge is back in bear market territory. Things aren’t much better for the Bloomberg U.S. Aggregate Bond Index, which is lower by a staggering 13.61% this year.

The Federal Reserve added to those woes on Wednesday. In its fifth rate hike of 2022, the central bank again boosted borrowing costs by 75 basis points and the prevailing wisdom is that at least another 125 basis points worth of increases are coming before the end of the year – 75 basis points next month and 50 in December.

For clients hoping the rate hikes will end next year, advisors ought to tell them they might be waiting awhile because market observers are calling for at least 50 basis points worth of rate increases in the first quarter.

Those are obvious headwinds for risk assets and clearly for bonds as well, but even with all the Fed-induced commotion, market participants, including advisors and their clients, remain fond of exchange traded funds. A recent Charles Schwab survey confirms as much.

What Says the Schwab Survey

Schwab has been conducting its annual ETF survey for a decade and in the latest iteration of “ETFs and Beyond,” Schwab Asset Management discovered 80% of investors view investors as their preferred instrument of choice – a 9% increase in just two years.

“ETFs now make up 33% of ETF investor portfolios, up from 27% five years ago, which tracks to the rate of growth those surveyed by Schwab predicted in 2017. Looking ahead, ETF investors expect 40% of their portfolios to be in ETFs in the next five years. And an overwhelming majority (93%) expect to purchase ETFs in the next two years, while 41% of non-ETF investors are also likely to do so,” according to the survey.

None of those data points are encouraging for traditional actively managed mutual funds, which continue ceding market share to lower cost, more tax-efficient ETFs. On the other hand, this is good news for advisors because as the Schwab survey indicates, many ETF investors make for ideal clients because they’re patient and not prone to sell at the first hint of market duress.

“ETF investors largely stayed the course with their ETF investments during the first half of 2022 despite a very challenging market environment. About half of ETF investor respondents said that market disruptions — including market volatility, rising interest rates and high inflation — did not impact how they invested in ETFs. Nearly one-third put more money into ETFs in response to these disruptions and around one-fifth took money out of ETFs,” adds Schwab.

This year, 56% of those polled by Schwab plan to use ETFs to access equities while more than 40% will use ETFs to tap bonds, digital assets and real assets.

Millennial Trends

For advisors looking to lure more millennial clients, the survey contains some important, revealing details about that demographic’s views and use of ETFs.

“Millennial ETF investors have more of their portfolios in ETFs today compared to other generations and they see a larger percentage of their portfolios in ETFs in the next five years compared to Gen X and Boomers,” according to the Schwab survey. “These younger investors are more likely to be extremely confident about their abilities to choose ETFs that can help achieve their investment objectives and to meet their desired investing outcomes. They are primarily focused on building wealth for major life milestones (66%) and saving for retirement (63%).”

Advisors should also note millennials are apt to use ETFs to employ values-based investing, including environmental, social and governance (ESG) and climate-aware strategies.

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