At the Online Broker, hosted annually by, leaders in online brokerage and Exchange Traded Funds (ETFs) came together to discuss how we might harness this abundant asset category and move it forward for mutual benefit with investors.
Amelia Young, Principal, Upside Consulting Group Inc., moderated a lively panel discussion including:
A crucial part of the self-directed space, exchange-traded funds (ETFs) have exhibited tremendous upside potential, with double-digit growth in countries across North America and Europe. In the U.K. alone, ETF users grew 30% in 2012-2013, and 20% the following year. This unprecedented growth can largely be attributed to ETFs’ ability to provide instant diversification and their widespread use as a cost-effective replacement for other financial vehicles (mutual funds, bonds, stocks). Another key growth differentiator is ETFs’ unique ability to deliver access to precise markets and various investing themes, such as cybersecurity, which mutual funds have not been able to deliver.
Industry studies have found that ETF users skew both younger (under 35) and older (over 65), while those aged 35-65 have less ETF exposure in their portfolios. Data also indicates that ETF users remain largely male, and that Millennials continue to be a key demographic in the self-directed channel.
Industry studies have found that ETF users skew both younger (under 35) and older (over 65), while those aged 35-65 have less ETF exposure in their portfolios. Data also indicates that ETF users remain largely male, and that Millennials continue to be a key demographic in the self-directed channel.
It’s critical that investors have a fuller understanding of ETFs, and how ETFs fit in their portfolios. Unfortunately, studies indicate that the current level of ETF knowledge is strikingly low, with a Fidelity study finding that just 13% of self-directed investors consider themselves knowledgeable about ETFs. The reality is that many clients don’t even know they have ETFs in their portfolio because they’ve been included in their “wrap” product holdings. Consequently, it’s imperative that educational tools continue to evolve so that investors have the knowledge they need to invest confidently.
With the ETF "choice overload" problem, online brokers and ETF providers may start to think about design patterns that make choosing easier for investors. This TED Talk by Sheena Iyengar focuses on the need to "cut and categorize".
Impending Regulation. While it’s not entirely clear how CRM2 will affect the investment landscape, there is the potential that many Canadian investors will be displaced by advisors and end up on self-directed platforms. If self-directed investors are unable to access advice as a result of financial regulations, there is a danger that many will simply sit on cash. It’s imperative that the industry works hand-in-hand with regulators to help investors achieve the outcomes they require.
[More information on CRM2 from The Globe and Mail: Here's what your fund fees, performance will look like under new guidelines]
If CRM2 gives investors sticker shock from advisor fees, their possible move to self-directed platforms underscores the need to safeguard industry reputation and educate on trading costs
Safeguarding Reputation. The “Flash Crash” of August 24th was acutely felt in the ETF space, particularly in the form of pricing issues. While clearly a market structure issue, the complexity of the topic increases the likelihood of misinformation and, by extension, has the potential to tarnish the industry’s reputation. The events of August 24th clearly underscore the need for additional education – not just about ETFs, but about trading costs in general. The fact that so many ETF investors are still relying on market orders is a clear indication that much work still needs to be done.