Why ETFs Are Popular with Wealthy Investors
By Anthony Jerdine | March 22, 2016
The higher their net worth, the more likely wealthy investors are to invest in exchange-traded funds (ETFs), according to research by Spectrem Group. This is particularly the case with younger investors, the study, Asset Allocation, Portfolios and Primary Providers, found.
The study breaks down just how much ETFs account for in the portfolios of affluent, millionaire and ultra-high net worth investors. Spectrem’s research also reveals which demographic is most likely to give their financial advisor the responsibility of managing their ETF investments.
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Here are the salient points from the study that can help advisors zero in on how better to serve these demographics. (For related reading, see: Finding and Retaining High Net Worth Clients.)
Allocation Among Investors
Domestic ETFs make up 14%—with an average value of $26,000—of the portfolios of mass affluent investors. This is up slightly from 2014 when ETFs with an average value of $25,000 made up 13% of their portfolios. These investors are defined as those with a net worth between $100,000 and $1 million (not including primary residence).
One-fourth of millionaires with a net worth up to $5 million invest in domestic ETFs. The mean value of these investments is $88,000. This is down from last year when 28% invested in domestic ETFs, which had an average value of $92,000.
Ultra-high net worth investors, or those with a net worth between $5 million and $25 million, are the most likely to be invested in domestic ETFs, Spectrem’s study found. Forty-three percent, up from 40% in 2014, are invested in ETFs. ETFs in their portfolios have an average value of $438,000. This is down from $469,000 in 2014.
The likelihood of the mass affluent, millionaires and the ultra high net worth investing in ETFs in the next 12 months also increases with their net worth. Thirteen percent of mass affluent investors indicated that they would invest in ETFs over the course of the next year. This compares with 21% of millionaires and 31% of ultra high net worth investors. Each percentage is basically unchanged from 2014, Spectrem points out.
Significance of Age
When it comes to ETF ownership, age is only a significant factor among millionaire and ultra high net worth investors. Of the 25% who are invested in ETFs, 63% are Millennials. Only 37% are Gen Xers and 23% are Baby Boomers. Among the 43% of ultra high net worth investors who invest in domestic ETFs, almost half are 47 years old and under or 48-54.
Young millionaire and ultra high net worth investors are much more likely than their older counterparts to give their financial advisor the primary responsibility of managing these investments. Almost seven out of 10 millionaire Millennials and 44% of ultra high net worth investors ages 47 years old and under indicated that their financial advisor is primarily responsible for managing their ETFs.
Diversification and Other Drivers
Diversification is one of the primary factors affluent investors consider when selecting an investment. ETFs are finding increasing favor with wealthy investors for their diversification benefits, the research found. They are lower cost and there is a wide variety of ETFs to choose from. These funds can also be traded at any time of the trading day—like stocks—and not just at market close, like mutual funds.
Spectrem points out that young investors who tend to be more tech-savvy and environmentally conscious than older generations may find ETFs increasingly attractive. That’s likely because there’s a large pool of specific ETFs that track markets appealing to investors interested in niche markets, such as technology and socially-conscious companies.
ETFs are very popular with high net worth investors. Young millionaire and ultra-high net worth investors are also much more likely than their elders to give their financial advisor the responsibility of managing their ETF investments. Having a good background in ETFs and being prepared to offer a wide selection of them can only help advisors looking to broaden their cadre of wealthy investors.