Schwab: Investors Not Over-Trading ETFs
July 26, 2012
ETFs are often touted for their tradability relative to mostly buy-and-hold mutual funds, but it seems investors by and large are not buying ETFs to trade them, but rather to hold them for the longer term, Charles Schwab said.
In its latest “ETF Investor Snapshot” report, Schwab—one of the largest custodians of U.S. ETFs—looked at investor ETF trading activity for the first time, and it found that investors aren’t trading a lot, particularly in the fixed-income space. The findings were consistent with a recent study by rival money manager Vanguard.
While fixed-income ETFs represented 37 percent of year-to-date ETF flows at Schwab, they captured only 14 percent of total trades in that time period, the report said. The numbers are a bit better for U.S. equities ETFs—they snagged 25 percent of trading activity so far this year. But the bottom line is that relatively low trading volume seems to refute the notion that ETFs are too often used as trading vehicles.
“Most investors are not day-trading ETFs,” Beth Flynn, a Schwab vice president and its head of ETF Platform Management, told IndexUniverse in an interview. “By and large, clients are using ETFs as longer-term additions to portfolios.”
It’s true that retail traders are trading more assets per trade and more often than any other client segment, but that just validates the company’s segmentation of its clientele, Flynn said.
The split of trades between retail traders, retail investors and clients of registered investment advisors (RIAs) was roughly even, but traders are a much smaller group than the other two, representing only 10 percent of total custodial ETF assets at Schwab.
Mutual Funds Stand To Lose?
You might think that if investors aren’t buying ETFs for their tradability, perhaps their low cost might be fueling asset growth at the expense of mutual funds. But Schwab has yet to see any evidence of that sort of zero-sum game.
“At Schwab, we have no clear evidence that ETFs are affecting flows into mutual funds,” Flynn said. “In fact, we’ve seen strong flows into mutual funds too.
“The clients’ choice is more between active vs. passive management than it is between ETF and mutual fund,” she said.
That said, Flynn also noted that the advent and growth of actively managed ETFs could tip the balance between ETFs and mutual funds, as investors have more and more access to active management via ETFs space. But Schwab has yet to see those kinds of asset flows either.
Schwab’s ETF Assets Grow On Retail Investor Demand
Trading aside, the growth of ETF demand among retail investors is clear.
ETF assets at Charles Schwab jumped 9 percent between June 2011 and June 2012, to $135 billion, with retail investors representing as much as 55 percent of those asset flows, the company said in the report.
The overall U.S. ETF market grew 8 percent in the same period, to nearly $1.2 trillion.
Schwab’s latest findings are further confirmation that smaller retail investors represent the next big wave of ETF market growth in an industry that has been dominated by larger, often institutional, names for much of its 20-year history.
At the end of June, retail investors represented roughly 40 percent—or $54 billion—of all Schwab’s ETF assets, a 15 percent jump in the past year alone, the company said.
Demand from retail investors is outpacing that of other client segments such as traders and RIA clients “because they still show pretty low use, they are further back in the learning curve,” Flynn said.
Contact Cinthia Murphy at email@example.com