Advice plays small role in ETF popularity

Financial advisers may see the advantages of advising on exchange-traded funds (ETFs), but the increasing popularity of ETFs is being driven by self-directed investors, according to Investment Trends research.

Investment Trends' 2010 Alternative Investments Report revealed that 70 per cent of ETF investors were self-directed and not influenced by an adviser.

The research was conducted in November and December 2010, and surveyed 7,811 respondents investing in alternative investments. Investment Trends analyst Recep Peker (pictured) said Australian investors were increasingly embracing alternative investments as the number of investments grew 14 per cent to 330,000 in the 12 months to December 2010, and the current allocation to alternative investments within their investment portfolios had increased from 16 per cent the previous year to 18 per cent.

The most popular alternative investments were listed investment companies (LICs), followed by ETFs, and commodities and resource funds, Peker said. While the number of investments for ETFs and LICs were similar, the number of investors using ETFs and LICs grew by 39 per cent and 26 per cent, respectively.

Peker said in 2008 financial planner interest in ETFs was increasingly due to diversification (30 per cent) and low cost (31 per cent).

"But that really shifted significantly in 2010, when 14 per cent stated that the main benefit of ETFs was diversification and 44 per cent were saying that the main benefit of ETFs was low cost," he said.

"Greater pressure has come on fees from clients, but also as advisers move to a fee-for-service model it's harder to justify higher fees. It's more a cost awareness thing."

From an investor perspective, diversification was considered to be the main benefit of ETFs, said Peker. Two-thirds of investors surveyed felt that diversification was the main reason for investing in ETFs, while half said the reason was low cost.

Advisers have not played a role in the increasing interest in ETFs from investors, even though they themselves are increasingly seeing the low cost and diversification benefits, said Peker. Only 10 per cent of respondents investing in ETFs stated that they were being advised by a financial planner and a further 10 per cent by stock brokers. Some 37 per cent stated that no adviser played a part in their decision to invest in ETFs, while an additional 33 per cent stated that they did not use financial planners.