ETF investors: well-informed and independent

These trends are documented in the results of an opinion survey by Toronto-based Pollara Strategic Insights, sponsored by the Investment Funds Institute of Canada (IFIC) and released in September 2019. For the first time since the 2006 inception of this annual survey, Pollara interviewed ETF investors as well as those holding mutual funds. A total of 500 ETF investors and 1,024 mutual fund investors participated in phone interviews conducted from late May to mid-June.

Pollara found that ETF investors tend to have broader preferences in the types of investment funds they hold. Among the ETF investors surveyed, 66% also held mutual funds. But only 19% of mutual fund respondents also held ETFs. The survey also indicated that there’s ample scope for sales growth for ETF providers. One-quarter of the mutual fund investors surveyed plan to increase their holdings of ETFs. There’s also a gender gap: male investors are somewhat more confident in ETFs than female investors.

But advisors should not presume that younger investors, who are generally more tech-savvy and less set in their investing ways, are more receptive to ETFs than baby boomers. The notion that it’s just younger people going online and favouring ETFs is not the case, says Lesli Martin, vice president of public affairs at Pollara. While 22% of the ETF investors surveyed were under 35, this was also true of 20% of mutual fund investors. Toward the older end of the demographic spectrum, 43% of ETF investors were 55 or older, compared with 49% of mutual fund investors.

“There’s not that huge of a difference,” says Martin.

Among investors who are clients of advisors, there are similar satisfaction levels among holders of both types of fund structures. Of those who said they were satisfied or completely satisfied, 81% were mutual fund investors and an even higher 91% held ETFs. “There are very high levels of confidence in advisors’ advice among both mutual fund investors and ETF investors,” says Ian Bragg, IFIC’s director of research and statistics. “Also, the value that ETF investors and mutual fund investors place in their advisor is similarly high.”

However, ETF investors were much more likely to be self-directed than mutual fund investors, and less likely to give credit to advisors. “One of the major differences is how they purchase their products,” says Bragg. He noted the survey finding that 80% of the most recent purchases of mutual funds were through advisors, compared with only 46% of ETF purchases. The self-directed cohort also tends to be the most knowledgeable about investing, and the most confident in using online brokerages.

Despite the growing acceptance of electronic delivery methods, the survey indicated that online investment advisors, also known as robo-advisors, lack widespread acceptance. Only 18% of ETF investors and 16% of mutual fund investors told Pollara they were likely or very likely to use a robo-advisor.

Even so, this modest level of acceptance suggests the market share of robos will continue to grow. As of mid-2019, robo-advice assets under management in Canada totalled $5.9 billion, up 88% year over year, according to the Investor Economics Fintech Advisory Service.

The growth in popularity of ETFs has led most major fund companies, and many smaller ones, to offer choices between the two structures. Increasingly, providers of ETFs and mutual funds are one on the same. As of December 2019, according to IFIC, 28 mutual fund companies also offer ETFs.

Among the fund companies to recently expand in ETFs is Toronto-based iA Clarington Investments Inc. It created ETF series of three of its mutual funds in October 2018 and added three more in November 2019.

“Almost every major fund company, if they haven’t already, is going to be saying, ‘Why would we want to close the door on to the ETF investor?’,” says Adam Elliott, iA Clarington’s senior vice president and national sales manager. “This isn’t an either-or decision. This can be making ourselves available to both types of clients.”

Consistent with the findings of the Pollara study, says Elliott, the client voice has become increasingly important in recent years. “We used to often hear advisors say, ‘My client turns to me to make the investment recommendations so I’m driving the bus,’” he says. “Whereas increasingly we’re hearing, especially from ETF investors, that a lot of it is client-driven, where the client is saying, ‘I want ETFs’ and, just as often, ‘I do not want mutual funds.’”

When the 2019 year-end IFIC sales report is released later this month, it’s expected to confirm that net sales of ETFs exceeded those of mutual funds for the second year in a row, and by a considerable margin.

One of the challenges for advisors is that holding periods for ETFs may be shorter than for mutual funds, since there are no meaningful deterrents to frequent trading. Unlike mutual funds, there’s no such thing as short-term trading fees for ETFs. “If our ETF business continues to come primarily through advisors,” says Elliott, “hopefully advisors are providing some counsel on the fact that frequently trading any security, ETF or stock, generally isn’t a good idea.”

Expanding choice in product structure in the retail fund industry isn’t exclusively about creating ETFs. Toronto-based Evolve Funds Group Inc., which entered the ETF market in September 2017, created the first mutual fund series of its funds in April 2019.

“I personally think that the future belongs to ETFs,” says Evolve president and CEO Raj Lala.  “But we created a mutual fund class because we want to let people access the structure that they are much more comfortable with.” While noting that most mutual fund dealers aren’t able to sell ETFs, Lala says some investment dealers prefer using mutual funds because they don’t like dealing with bid-offer spreads and their clients don’t need intra-day trading liquidity.

In offering a choice between fund structures, says Lala, companies need to ensure that the management fees of fee-based mutual fund units are no higher than those of ETF units. “Most of the dealers out there wouldn’t even approve the mutual fund if there was an ETF class that was charging a lower fee than the (F-class) mutual fund.”