Poor financial literacy, reluctance to discuss money and poor access blamed for low take-up
Rebecca Hampson
© Alamy
Most people find investment a daunting subject, and market watchers blame poor financial literacy for so few retail investors using exchange traded funds.
The ETF business may be growing quickly — global assets were $5.65tn at the end of August, according to ETFGI — but the retail sector accounts for just 15 per cent of European investment, says Deborah Fuhr, co-founder of the consultancy.
The group says there are 2,351 ETFs in Europe with 8,662 cross-listings. With that many products, why are retail investors so reluctant to enter the market? One reason is education.
This is much vaunted by the industry but may not always be targeted properly.
“We could do a lot more as an industry. It’s a topic that crops up most of the time across all investor channels”, says Marcus Miholich, head of capital markets for Asia-Pacific, Europe, Middle East and Africa at SPDR Exchange Traded Funds. “We get asked a lot about liquidity in stressed markets and when it makes sense to use an ETF. These are all areas where we are able to directly educate clients but it’s not always this linear with other investor channels.”
The simplicity, low cost and liquidity of ETFs make them a natural choice for institutional investors, which often use them instead of futures.
James McManus, head of research at Nutmeg, says: “We are seeing the likes of insurance companies, hedge funds and charities turning to ETFs. Choosing ETFs over futures indicates that there are naturally more drivers for institutional investors to use ETFs.”
It is ironic that while a lot of information and education is made available to institutional investors, retail investors miss out on the message.
Part of the reason is that ETFs can be hard to invest in — which the industry agrees is one of its biggest challenges.
A typical retail investor will decide how to invest by going to a platform or independent financial adviser. Many platforms offer only a few ETFs while advisers often do not make them available as part of a portfolio.
Mr Miholich says: “Platforms continue to be fairly slow in introducing ETFs to investors and we have conversations about frustration at the lack of ETFs available on certain platforms.
“The reason for this slow uptake is apparently a result of technology constraints but ETFs are still a simple wrapper with an easy-to-use structure. Because they aren’t available on the platforms that the IFAs use, there is a block to a large section of the retail market, particularly in this country [the UK]. Until this changes it is going to be quite limiting to retail growth.”
ETFs are also still competing with actively managed funds. Mr McManus explains: “There is still bigger cash flow into actively managed strategies, which are easier to market because the money is there. This is the case with many of the retail platforms in the UK.”
The situation is reflected in the lists of top funds found on many platforms, many of which feature no ETFs. In Hargreaves Lansdown’s Wealth 50, a shortlist of its experts’ favourite funds, there are 10 trackers and no ETFs among the 58 funds.
Emma Wall, head of investment analysis at Hargreaves Lansdown, says it has an open architecture and so offers UK investors almost all the ETFs on the market.
Frustratingly, however, the issues run deeper than education and access. ETFs gained a bad reputation after they were likened to “collateralised debt obligations and other three-letter abbreviations that caused the financial crisis”, says Peter Sleep, senior portfolio manager at Seven Investment Management.
“Their difficulty now is sometimes made more complex than it needs to be. I personally do not think doing due diligence on ETFs or doing education on ETFs is very difficult. Consultants like to play up the difficulty but I don’t buy it.”
Ms Fuhr adds: “People in general are creatures of habit and do not change. Social norms frown upon the discussion of wealth and finances, it is a scary topic for many as they do not know who to turn to for advice — so financial literacy is low. It all just needs to start at a young age.”
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