Are ETFs the Next Big Thing for Ultra-Wealthy Investors?
Assets under management in exchange-traded funds have rocketed to a new all-time high this month. According to the tracking site IndexUniverse, the U.S. ETF industry had $1.453 trillion in assets under management as of March 8. That's the highest the asset level has ever gotten, according to the site.
The explosion of popularity that ETFs have enjoyed has a number of root causes, including their low costs and the broad diversification they offer. A recent survey, however, suggests another intriguing factor possibly contributing to ETFs' ballooning asset levels: increased interest among millionaire investors.
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According to a survey conducted by the consulting firm Spectrum Group, high-net-worth investors are increasingly looking to ETFs when investing their money. The survey found that in February 2013, 30 percent of millionaire investors indicated that they are likely to invest in ETFs. In August 2012, that number was just 10 percent. By contrast, non-millionaire investors "appear slower to adopt ETFs," the survey found. "The share is up from 7 percent to 14 percent among individuals with investable assets of $500,000 up to $1 million, but remains essentially unchanged for less affluent investors. Among those with less than $100,000 less than 6 percent are likely to invest in ETFs in the next 12 months."
So why the sudden interest among wealthy investors? It likely has to do, at least in part, with a trend that is observable across the wealth spectrum. This year, investors are beginning to overcome their trepidation about the stock market. As a result, they've been pouring money into equity products of all stripes, including ETFs and mutual funds. "We've seen investors move back into equities in 2013," says Todd Rosenbluth, director of ETF research at S&P Capital IQ. "People got in in January, and then they saw the market continue to move higher, and then [they] continued to move in in February."
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Rob Ivanoff, president of the firm Financial Products Research, suggests that another piece of the equation is that wealthy investors are beginning to see ETFs as a viable option rather than a passing trend. "They want to make sure the trend is established [before investing]," he says.
And then there's the intensifying battle between ETFs and mutual funds over investors' money. Investors are "pouring into ETFs for all the reasons that made [ETFs] popular" in the first instance, Ivanoff says. Perhaps chief among those reasons is that ETFs are, by and large, cheaper to own than mutual funds. "If you're tired of failing to beat the market--because the average equity mutual fund fails to beat the market on a regular basis --[then] ... ETFs are a great way to get exposure to [a variety of] asset classes in a very cheap way," Rosenbluth says. "Paying less money for it helps your returns."
[Read ETFs vs. Mutual Funds: Which Is Better?]
Rosenbluth cautions, however, that investors who are interested in ETFs need to look at more than merely the price tags of the various options. "For an investor that's looking to get into this, the most important thing they should do is understand what they're buying," he says. "There's more to an ETF than just its low cost. You've got to look at it and determine ... whether what's inside it is a good thing for you."
