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Almost a third of UK investors aged over 55 have never heard of exchange traded funds, compared with just 8 per cent of investors in the 18-34 age bracket, according to a new survey.
The blind spot is indicative of a lack of understanding and awareness of the fast-growing ETF format that appears to be holding back many older, lower income and female investors from the fund structure, said the Investment Association, which carried out the study.
“A sophisticated segment of younger, self-directed investors is embracing ETFs for the advantages of intraday trading and cost-efficient structures,” said Miranda Seath, director of market insights at the IA.
In contrast, “If you look at the broad investor base, particularly investors that don’t hold ETFs, it’s a lack of knowledge . . . that is holding them back,” she added.
ETFs, developed in the 1990s, are a more modern take on the century-old mutual fund format. Both typically provide a diversified basket of investments, usually shares or bonds. However, ETFs differ from mutual funds by being listed on a stock exchange, making them faster and simpler to trade, while they can also have tax advantages, particularly those holding US equities, and often have lower management fees.
Most ETFs passively track an index, such as the FTSE 100, but more actively managed vehicles are now being launched.
The IA’s analysis of 2,000 UK investors found that take-up of ETFs is being driven by younger, wealthier and male investors.
As many as 41 per cent of ETF investors are aged 18-34 and just 17 per cent 55-plus. Among UK investors as a whole, these figures are reversed at 25 per cent and 44 per cent respectively.
Almost a third of ETF investors earn more than £90,000, compared with just 13 per cent of investors at large, while half started investing in the past five years and two-thirds are male.
ETF investors are also far more active, with just 4 per cent having not made a trade in 12 months, compared with 38 per cent of investors overall.
Among the IA’s recommendations are a co-ordinated industry-wide investor education programme and for investment platforms to broaden the range of ETFs they offer, lower the minimum investment and reduce dealing fees, which it sees as a barrier to adoption.
Financial advisers should also be more open to the fund structure, the IA said, with the survey finding more than half of advised clients have never received a recommendation to buy an ETF.
Alan Miller, chief investment officer at SCM Direct, a London-based wealth manager focused on ETFs, said he was unsurprised at many older investors’ lack of awareness of the funds, and backed the idea of an education campaign, but thought it could be problematic for much of the industry.
“More and more younger investors understand the virtues of ETFs, and therein lays the problem for the average asset manager, because ETFs tend to charge lower fees, have more liquidity and have better performance [than their own funds]”.
While some might view it as of limited importance whether people invest in ETFs or mutual funds, Seath believes that greater understanding of ETFs would help facilitate chancellor Rachel Reeves’ aim to boost investment in UK financial markets.
“We think it’s going to be absolutely critical across our core mission of encouraging more people to invest,” said Seath.
