Cost is paramount for ETF investors

Cost is the main consideration for investors when choosing ETFs, with over 60% of current ETF users citing low-cost as a 'very important' factor, according to Morningstar.

An exclusive survey of over 1,000 investors conducted by Morningstar in conjunction with ETFM shows 29% of respondents view low-cost as 'important,' while no investors viewed low-cost as 'unimportant.'

Morningstar ETF strategist Ben Johnson says: "Investors are increasingly aware of keeping costs down, and ETFs underscore the importance of low-costs.

"Competition within the ETF industry is keeping costs low. As ETFs take a greater portion of the overall asset pie, competition will also increase with active management."

The survey shows 42% of investors say the ability to access new asset classes in ETFs is 'very important,' followed by the intraday liquidity offered by ETFs, with 31% of investors citing this as 'important.'

Only 10% of respondents believe the ability to short sell ETFs is 'very important,' while 33% view this as 'unimportant.'

In terms of how ETFs track indices, the vast majority of respondents (77%) prefer physical replication, while only 7% opt for swap-based funds. 16% of respondents do not have a preference, or cite the difference in replication as 'unimportant.'

Johnson says: "Preference for physically replicated ETFs over synthetic is a legacy preference to an extent. It's also easier to understand physical replication, as opposed to the investor having a claim on a substitute basket. Education is paramount."

On the issue of counterparty risk, 53% of respondents say they are 'somewhat concerned,' compared with 31% who were 'very concerned' and 14% who were 'hardly concerned.'

The survey also reveals that most investors (59%) expect a lower expense ratio as compensation for having slightly greater counterparty risk. Around 33% say they would want better liquidity, and 21% lower tracking error.

Among the professional investors asked if they were unsure about investing in ETFs in the future, 67% say they would prefer to learn more about ETFs first, while 31% say they would prefer an active manager.

Similarly, 77% of individual investors asked the same question would prefer to learn more about ETFs first, while 19% say they are concerned about the risks associated with swap-based ETFs.

The survey, conducted from 4 March until 15 July, gained responses from 870 individual investors and 150 professional advisers. The second ETF survey is now open and is accessible via the Morningstar ETF Centre at www.morningstar.co.uk.