NEW YORK (MainStreet) — Inna Pudel, a Brooklyn resident in her 60s, has been investing in Exchange-Traded Funds (ETFs) for ten years now. She used to invest in mutual funds but says that ETFs are more convenient.
"ETFs give me more control," Pudel told MainStreet. "I can invest in gold, currency, oil, real estate. They're also cheaper." Among the retired computer programmer’s investments is iShares Nasdaq Biotechnology ETF (IBB).
About 85% of her investments are in ETFs. “They perform better than mutual funds,” Pudel said.
Some 32% of individual investors own ETFs in their portfolios, according to a recent Fidelity and BlackRock ETF Trend Study.
“Many investors recognize that there are a variety of ways to get different kinds of exposure they want to express in the stock market,” said Andrew Brownsword, senior vice president of Fidelity retail brokerage. “ETFs are a simple and easy way to do that.”
An ETF Education
While more than $2 trillion in assets are invested in ETFs, 61% of individual invests have not yet invested in ETFs. “There is plenty of information about ETFs currently available, but what this research tells us is there is still a significant opportunity to help with the basics,” said Jennifer Grancio, managing director and head of BlackRock’s alliance with Fidelity Investments.
When asked what information they lacked about ETFs, 55% of investors cited how to evaluate ETFs, 51% said the benefits of ETFs and 49% noted how ETFs work. But because ETFs are easy and flexible, younger investors between the ages 25 and 49 are far more likely to use ETFs in their portfolios.
“They feel there’s less risk in an ETF than buying just one stock,” Brownsword told MainStreet.
Like traditional mutual funds, ETFs are baskets of stocks and/or bonds, but while most mutual funds have a portfolio manager making decisions about which investments to buy and sell, ETFs are almost always passive investments.
"They are like index funds in that they seek merely to replicate a particular index or benchmark," said Ken Weber, president of Weber Asset Management and author of Dear Investor, What the HELL are You Doing? (Greenleaf Book Group Press, 2015)
As with traditional index funds, ETFs tend to have very low expenses.
"Since no one is paid to make investment decisions, total operating costs can be substantially lower than for most actively managed mutual funds," Weber told MainStreet.
Rise In Popularity, Rise In Returns
The Fidelity and BlackRock study found that 30% of younger non-ETF owners plan to purchase ETFs in the next 12 months compared to only 18% of those age 50 and up. iShare core funds are reportedly a good way for younger investors to get started investing in ETFs. “They are inexpensive and allow younger investors who are starting their portfolios to easily build a base,” said Brownsword.
There are more than 300 iShare ETFs to choose from of which 20 are core funds. “Most are passive, which means they track the S&P 500, very broad fixed income indexes or international indexes,” Brownsword said. "You can expect to get the performance and returns of the index the ETF is tracking."
For example, the Fidelity MSCI Information Technology Index ETF (FTEC) returned 19.38% compared to the index it tracks, the MSCI IT Index, which returned 18.25% in 2014.
—Written for MainStreet by Juliette Fairley