Money managers have been pleasantly surprised to discover millennials love ETFs.
In a new investor study, Schwab reports that 63% of millennials, more than any other generation, said they expect ETFs to be their primary investment vehicle in the future, and 60% expect to increase ETF investments just in the next year.
To encourage that budding relationship, firms have to provide young investors more guidance about ETFs and how to invest in them, Schwab says, along with offering more SRI-focused products.
"I think if we have consumers that understand the strategies better and how they work, we all win," says Anthony Davidow, Schwab's vice president of alternative beta and asset allocation strategist.
Davidow and Heather Fischer, vice president of ETF platform management at Schwab, discussed the annual report with Money Management Executive at the Morningstar conference.
An edited transcript of the conversation follows.
What were you most surprised to see in this year's findings?
Fischer: There are three major themes that really stood out to me. One is the continued high level enthusiasm for ETFs. Two is the emphasis with millennials, specifically — if overall investors are enthusiastic, they are jumping up and down. Third are the interesting findings that we saw in socially responsible investing. While there are not a lot of assets in that space yet, we're seeing a lot of interest with the investors that we surveyed. It's an area to watch going forward.
Davidow: I would just say that, maybe it's not a surprise at all, which is a good thing, and that is the continuation of the positive trends, right?
Five or six years ago, when we first started doing these surveys, it was a very different picture than today. I think the level of understanding of the consumers is much farther along than it was. In particular, smart beta.
I think in the early days we would ask questions about what smart beta is and we got a lot of answers that reflected the fact that people didn't really understand what they were and how to use them. Now we're getting more sophisticated sorts of responses like, "I need to better understand how they're different," and, "I need to better understand how to us them in the portfolio." We've continued that trend of getting better and providing better education and at the end of the day, I think if we have consumers that understand the strategies better and how they work, we all win.
How are clients becoming savvier?
Fischer: I think there are a couple of factors at play here in terms of why are ETFs growing, why we continue to see a trajectory upwards with ETFs. Education is certainly one of them. Brokerage firms like Schwab play a role in helping clients get smarter about their ETF investing; absolutely asset managers and money managers do, as well, and advisors, too.
We see that in the numbers that we've been tracking in this survey for the past several years. When we first started it five or six years ago, the number of people who self-described themselves as a beginner was around 46%, that's dropped to 27% this year. It's a pretty dramatic shift.
Conversely, the number who describe themselves as experienced was 6% at the start and it's now 21%. Intermediate still hovers about the same but you're seeing some shifts in terms of peoples' knowledge and their confidence about that knowledge, which I think has had a role in some of the trends that Tony just mentioned as well, and in that overall growth, in general in ETF assets. They're getting smarter.
Davidow: At the Schwab Center for Financial Research where I work, our sole focus is to help inform advisors. We write and we speak to help answer those questions. A lot of what we've been writing over the past couple of years comes directly from questions that we were getting from clients.
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As an industry we've done a really good job. I think there is still work to be done. I think one of the things in the survey is there is still more education, especially as we start to focus on things like smart beta, that we need to continue. All of the providers understand that we all win if clients understand what they're getting into and how the strategies are different, as opposed to selling something based on the clever back test.
We're all in this together. I think it's a very unique industry in the sense that we all win by educating and I think many of the organizations have done a good job of doing that.
Is this 20% shift in clients' perceived competence in ETFs a sign that maybe they are overly confident?
Fischer: I think the level of knowledge has certainly increased, and the level of confidence, and that's probably because of all the things that Tony just mentioned, in terms of the efforts in the industry. The amount of information available and just a growing familiarity with ETFs as an investment vehicle which is frankly much more mainstream now than it used to be.
But the bar keeps getting higher so we cannot rest on our laurels. I think we have to continue to develop education, develop content and develop resources for the spaces that are new or for the vehicles and approaches and strategies that are newer to an investor.
These funds have the smallest beta scores, either positive or negative, indicating the least variability from market returns.
Socially responsible investing is a good example, as well as smart beta and they're telling us, "Yeah, I don't have that much in it, yet," but 46% say, "Hey, I'd be interested in that. It's important to me." About half of investors that we studied said, "I would invest more if I had more education."
They are really leaning into it and they know they need it, which I think is a positive thing. But we do have to be thoughtful and say, "Hey, this has evolved, this is new, and this is different."
What are some of the methods of education Schwab is using?
Davidow: We look at everything that's available and the papers really resonating with advisors today are about how to distinguish amongst the strategies. We actually take a few of the more popular strategies and strip them down layer-by-layer so the advisors understand.
Then a second paper that I think is critical to advisors when they understand it is about how they build portfolios.
We have a core point of view that market cap and fundamentals serve as a complement to one another. It doesn't mean it's the only point of view, but as we go through and lay out the logic of how an advisor thinks about building a portfolio and what the outcomes they expect for each one of the underlying strategies, it gives them a roadmap. If they wanted to change the components they could do that, but I think it's important to have a point of view. So that's for the RIA community.
For the individual investor community, realizing that some of this is very tactical in nature, what we try to do is we try to take some of those concepts and break them down into bite size articles with better visuals. A lot of those visuals are picking up on the same sort of points — how should they think about fundamental relative to momentum relative to low vol?
So we do articles, we do videos, we do info-graphics; all really designed to educate. There is nothing that we produce that is selling a product, but just to help people have better informed decisions.
Can you explain why socially responsible investing has become a trend?
Fischer: It definitely popped up as a trend in the investor survey. As we mentioned earlier, it's not big in terms of asset yet. Only 10% of our respondents said that they had some sort of socially responsible investment themselves, but the number who are interested is pretty high — 46% say, "Hey, this is important to me to invest in alignment with my values," and 47% say, "Yeah, I think investing in a socially responsible way can help me reach my goals."
So there's receptivity and an interest there. And again, higher with millennials than with some of the other segments, but we're seeing it grow — we're seeing that trend there. And what's missing, as before, what we want to focus on and continue to invest in is building the education and the guidance and the asset allocation models to help clients make decisions about the products that are available.
There is a product need. I don't think anybody would argue with that. We're not probably anywhere near along the curve as we are with regular investing, or mainstream investing. We certainly could use more. But I think as those things start to converge, the development of product, the development of the education tools and resources, and that growing need, we'll hit a tipping point for socially responsible investing. That hopefully will come soon.
Is that what's next: education around SRI and how that is different from other investments?
Fischer: Yes. There's a number of terms and definitions out there in the industry and I don't think we, as an industry, have aligned on what's right. That's almost as bad, if not worse than smart beta, strategic beta, and that challenge a while ago.
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There's certainly a need for alignment and education on kind of what it even is. I think it is education on products and what your investing needs are and how they fit in. I also think there's a product role as we talked about earlier and then the asset allocation piece, too.
Fifty eight percent of our respondents said that they think an index-based scale-type solution could work for them.
I think there's more we could do and I don't know if it's robo advisor or other packaging, but I think there's more we could do as an investment industry to just help build one-click solutions that will get people invested in a way that is in alignment with their values. So there is more to come.
Is this space becoming oversaturated?
Davidow: We would argue that there is still a lot of room for product innovation. I think the good thing is product innovation has to be designed well and we have to think through the implementation.
At the end of the day there's a lot more that can be done. There are areas like fixed income that really haven't seen a lot of development over the years. They've been talking about smart beta and the fixed income for years and every one of these conferences that I come to people say have we saturated the market or that there's too much.
There's a lot of areas of improvement in commodities and alternative SRI, so I would argue that the market by demand will tell us what we need and the consumers will say, "Does this make sense for what I am solving for or not?"
I would argue that we're so relatively young, as an industry, that there's still room for growth. I don't know that we need a lot more vanilla, but we need a lot more chocolate, strawberry and maybe some sprinkles on top.
