A new survey on ETFs by IndexUniverse and Brown Brothers Harriman found that although investors place significant weight on the brand of the ETF they choose, slightly over half of all respondents still view an index brand as equally or more important than the ETF brand.
The two companies compiled responses from over 1,000 financial advisors’ in order to determine their views on a range of topics surrounding ETFs. The results show that an index’s brand still matters in the wake of ETFs, such as some of Vanguard’s funds starting to change indexes to save on licensing costs. Specifically, the survey found that over 10% of respondents view the index brand as more important than the ETF brand, and over 40% think the index and ETF brands are equally important.
Conversely, 36% think an index brands matters less than the ETF brand, and 13% think an index brand does not matter at all.
“I think certain indexes are important and have brand recognition,” said Shawn McNinch, senior vice president, global head of ETF services for Brown Brothers Harriman. “I think as we move into more enhanced beta and active ETF products, where a lot of ETF sponsors are driving the investment process, that it’s probably less important.”
While these stats indicate that advisors may be moving towards caring about the ETF brand more, advisors still value the underlying index, and ETF sponsors could lose out on investors by tracking a lesser known index.
The real significance of the index brand is revealed in a posed hypothetical question by the survey. When asked if investors would pay an extra ten basis points in expenses for an ETF tracking a major index provider rather than the same ETF sponsor tracking an unknown index but with similar exposure, two-thirds of respondents said they would pay the higher costs.
However, when broken down by the actual amount of extra basis points investors would pay for an ETF tracking a brand name index, at most just 53% of respondents would pay 10 or more basis points. This seemingly contradictory finding indicates that investors more easily accept the premiums when lumped into the overall expenses of the fund, but when fees are itemized, investors are less willing to pay higher premiums.
The survey also found that just over 50% of respondents think equities are the most important asset class, followed by 19.3% thinking fixed income matters the most. Similarly, 42.2% of advisors plan to increase their clients’ exposure to equities over the next six months, while only 11.4% expect to increase clients’ fixed income exposure.
“Equities have been a primary focus in the marketplace. I think that’s still what advisors think of with an ETF,” said McNinch. “That could potentially change as more products, such as fixed income products, come to market.”
When asked what the most important factor is for choosing an ETF, 58.5% said the ETF’s strategy/exposure mattered the most with 13.3% valuing the ETF brand as the most important factor. Conversely, 42.4% of advisors said trading spreads mattered the least, followed by historical performance at 31.1%.
The fact that trading spreads mattered the least surprised McNinch. He said that even though there has been media attention regarding the liquidity of ETFs, “it doesn’t seem to be resonating well with the advisor community…Advisors may still be using traditional [mutual fund] screening techniques when selecting ETFs.”
In terms of the actual brands that advisors think deliver the highest-quality ETFs, Blackrock/iShares led the way, with 78.5% of respondents including the brand when asked to choose three. Nearly 60% had Vanguard on their list, with State Street Global Advisors rounding out the top three with 52%. The top five highest ranked funds are also the five largest funds, but PIMCO did come in at number six with nearly 16%, even though it is the 11th-largest ETF issuer.
The full results of the survey will appear in the September 2013 issue of IndexUniverse’s publication, ETF Report.
ETF Investors Still Value and Will Pay Premiums for Brand-Name Indexes, Finds Survey
A new survey on ETFs by IndexUniverse and Brown Brothers Harriman found that although investors place significant weight on the brand of the ETF they choose, slightly over half of all respondents still view an index brand as equally or more important than the ETF brand.