DataTrek's Colas on ETF Investor Perceptions Survey
Traders Magazine Online News, November 20, 2019
Nicholas Colas
The following article originally appeared in a recent research note from DataTrek.
The ETF Investor Perceptions Survey
The role of exchange traded funds in capital markets is one of those topics that hits our “Markets, Data and Disruption” thematic focus dead-on. We’ll therefore take the whole report to discuss the survey’s results but still use the customary tripartite framework to summarize our conclusions.
First, some background:
- We had 157 respondents, virtually all (96%) from the DataTrek community plus a few from social and our friends at ETF Global.
- 70% of respondents are employed in the financial services industry, with the remainder either working outside the industry (8%) or choosing to classify themselves as “student/retired/other” (22%).
- 73% of financial services respondents work in asset management (institutional, RIA, family office) with the rest either employed by brokerage firms (18%) or the ETF industry (9%).
- We randomized all questions where it made sense to do so, and the results below only include completed surveys.
- Some questions allowed for more than one response. In our review below we give the number of votes these questions received by possible answer. For single-response questions we cite percentage of responses.
Now, the questions/answers and some preliminary commentary on each:
#1: When considering an ETF, which attributes are most important to your investment decision? (Pick one or two)
- Expense ratio: 63 votes
- Liquidity: 58 votes
- Tracking error versus the underlying index: 35 votes
- Historical performance of the strategy: 29 votes
- Size (assets under management): 24
- I do not use ETFs: 22
Our take: This was a 2-horse race between “expense ratio” and “liquidity”. The first is a good reminder of why the ETF industry will continue to compete on price. The second speaks to investors’ desire to transact with ease and convenience.
#2: In which asset classes/investment styles would you most like to see more ETF investment options? (Pick one or two)
- None – the current ETF ecosystem serves my needs: 55 votes
- Thematic investments (i.e. marijuana, space or artificial intelligence): 44 votes
- Fixed income: 29 votes
- Equity style (i.e. Growth, Value, Momentum, etc.): 25 votes
- Commodities: 24 votes
- Environmental, Social and Governance: 19
- Crypto currencies (i.e. bitcoin): 16
- Volatility: 12 votes
Our take: only 35% of respondents feel there are enough ETFs already, and the top vote-getting area of potential growth is “thematic” ideas. That makes sense to us, since ETFs can efficiently target new/emerging investment themes and provide superior diversification over a single stock investment approach. One surprising answer: the relative lack of interest in ESG/crypto products, indicating that these themes may not see as much uptake as their potential sponsors might like.
#3: Do you own or are you interested in investing in actively managed equity ETFs? (Pick one)
- I am not interested in these products for myself or client portfolios: 34%
- Yes, I currently own at least one such product personally or for clients: 33%
- I do not own such a product for myself/clients but would be interested: 33%
Our take: no real difference between the answers, but only 33% of respondents indicated “no interest” so there is room for growth in actively managed equity ETFs.
#4: Have you ever wanted to buy a specific ETF but could not do so because it was not available on your investment platform? (Pick one)
Our take: investors who answered “Yes” were more likely to work as an RIA or in a family office and therefore may be more subject to the limitations of their firm’s platform.
#5: Have you ever shorted an ETF, either as a hedge or to express an investment viewpoint? (Pick one)
- No – I have never shorted an ETF: 71%
- Yes – both to hedge and express an investment viewpoint: 15%
- Yes, as a hedge: 8%
- Yes, to express an investment viewpoint: 6%
Our take: we were surprised that almost 30% of respondents have shorted an ETF, which we think of as more a hedge-fund strategy than anything else. Still, it is a good reminder that shorting ETFs carries many of the same benefits as going long: efficiency, liquidity, etc.
#6: What do you consider the biggest advantages of using ETFs rather than other investment vehicles like mutual funds/single stock ownership? (Pick one or two)
- Lower expense ratios: 59 votes
- Intraday liquidity and pricing: 54 votes
- General convenience: 42 votes
- Tax efficiency: 35 votes
- Transparency of holdings: 26 votes
- None of the above/I do not use EFTs: 17 votes
- Ability to short: 12 votes
Our take: just as in question #1, expense ratios and liquidity/pricing top the list. We were surprised tax efficiency was #4, because this is a large competitive advantage for many (but not all) ETFs over mutual funds.
#7: What approximate percentage of your/your clients’ long-term investment holdings are in ETFs? (Pick one)
- 0% - 20%: 55%
- 20% - 40%: 16%
- 40% - 60%: 15%
- 60% - 80%: 7%
- 80% - 100%: 7%
Our take: despite +2 decades of asset growth, ETFs remain relatively small parts of most respondents’ personal/professional portfolios.
#8: Do you expect to change your usage of ETFs either personally or on behalf of clients in the next 12 months? (Pick one)
- Leave usage unchanged: 66%
- Increase usage: 27%
- Decrease usage: 6% (rounding responsible for 99% sum)
Our take: on balance these responses imply that ETFs will continue to gain market share over the next year.
#9: In your opinion, do ETFs present systemic risk in any of these markets? (Pick all that apply)
- High yield corporate debt: 78 votes
- US large cap equities: 49 votes
- I do not believe ETFs present any systematic risk in these markets: 49 votes
- US small cap equities: 48 votes
- Sovereign/investment grade corporate debt: 35 votes
- International equities: 29 votes
- Commodities: 22 votes
Our take: 69% of respondents said ETFs present systematic risk in at least one market and 50% cited high yield debt as the asset class with the greatest risk, clearly concerned about the liquidity mismatch between ETFs and underlying securities.
#10: In your opinion, do ETFs meaningfully skew prices (i.e. more than 5%) in any of the following markets? (Pick all that apply)
- I do not believe ETFs skew asset prices in these markets: 71 votes
- Sector/thematic stocks (i.e. Tech, biotech, marijuana): 45 votes
- US small cap equities: 44 votes
- High yield corporate debt: 41 votes
- US large cap equities: 40 votes
- Investment styles like Growth or Value stocks: 25 votes
- International equities: 17 votes
- Commodities: 14 votes
- Sovereign/investment grade debt: 10%
Our take: 55% of respondents said they believed ETFs skew prices in at least one of these asset classes, a notably high level to our thinking. And while almost the same percentage reported being concerned about ETFs presenting risk to the high yield bond market, sector/thematic and US small caps ranked higher on this question than the previous one.
#11: How concerned are you about an ETF “flash crash” such as what occurred in August 2015? (Pick one):
- Somewhat concerned: 53%
- Not concerned: 23%
- Very concerned: 16%
- No opinion: 8%
Our take: taken in total, 69% of respondents reported some sense of concern regarding another flash crash.
Finally, we’ll briefly outline our thoughts about what these responses say when viewed as a collective whole.
Point #1 (“Disruption”): ETFs will continue to grow, gaining share from mutual funds and single stock ownership.
- 65% of respondents are interested in seeing new products across a wide array of asset classes. (Question 2)
- 33% would consider an actively-managed equity ETF, a competing product to mutual funds. (Question 3)
- 90% see advantages to using ETFs. (Question #6)
- Usage remains low and interest is increasing. ETF utilization runs +3:1 ahead of decreasing use. (Questions 7 and 8)
Takeaway: this is classic industry behavior from the later chapters of the “innovative disruption playbook”. ETFs began life as simple index-replication tools (SPY and QQQ in the 1990s), offering low fees, intraday liquidity and convenience. Now, they are moving up the value chain, offering an ever-more complete suite of product offerings. Just think of prior disruptive innovations, like Japanese cars (small at first, now strong across all product types) or Amazon (books first, everything else after that). Lasting disruption always starts at the low end of a market and climbs from there.
Point #2 (“Markets”): The cloud around that silver lining is that investors are clearly concerned about what the growth of ETFs mean for market structure.
- A clear majority (69%) of respondents believe ETFs have created systemic risk in important capital markets like high yield (50%).
- A close majority (55%) even believes ETFs are skewing asset prices by 5% or more and concern here centers on US equities.
- A wide majority (75%) worry about a flash crash.
Takeaway: the growth in ETFs since 2010 has created a capital market structure very different from all prior eras. Low equity returns over the last 20 years (6% CAGR on the S&P 500) have pushed more investors into cheap passive stock indices rather than paying for active management. ETFs were there to catch those dollars, but the result is that market participants now worry they have grown too large. Also, generally low equity market volatility since the Financial Crisis means this new world is yet to be tested. That is likely another factor in our respondents’ concerns.
Point #3 (“Data”): The latest ETF money flow data shows that even with their concerns (our survey being a proxy for those) investors continue to allocate incremental capital here. From www.xtf.com:
- Over the last 5 years US listed ETFs have received $1.5 trillion of fresh money.
- Inflows over the last 12 months total $318 billion, essentially spot-on the average of the last half-decade.
- Almost half (45%) of the last year’s inflows have gone to equities, despite investor concerns over systematic risk, price skewing, and flash crashes.
- Even high yield ETFs, where our survey indicated the greatest concerns, have seen $16 billion of inflows in 2019.
Takeaway: as with so many investment narratives, the data tells the story. The merits that investors see in ETFs continue to trump their concerns.
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