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The knowledge barrier

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ETF education is needed to appeal to the mass market, reports James Smith

In the 10 years since the first exchange traded fund was launched in the UK, the market has grown substantially. From a single product tracking the FTSE 100, the range of investment options now covers a range of global equity indices, commodities, currencies, money markets and fixed income.

But while institutional investors have been keen to take advantage of the low cost and high liquidity that ETFs can offer, take-up in the retail market has been low.

Compared with the US, where retail investors have become enthusiastic investors in ETFs (the market is split about 50/50 between institu-tional and retail investors), the UK retail market continues to lag behind.

Several reasons have been given for the low take-up, with two of the most common being a lack of commission and low levels of knowledge among both advisers and investors.

DB x-trackers head Manooj Mistry says the move to fee-based advice happened several years ago in the US and this helped boost demand for all forms of low-cost, passive investments. Mistry says the UK market is around eight years behind the US and expects to see a similar timeframe before we see UK retail investor demand matching institutional demand. The drivers for this change are going to be the RDR and a much greater move to asset allocation.

Mistry says: “Many investors are moving away from stock or bondpicking and towards asset allocation, with studies showing this determines the bulk of performance. This has increased the role of passive products and ETFs are at the forefront of this due to their flexibility.”

The increase in availability of ETFs through wraps and platforms is also likely to increase investment in ETFs, but one significant barrier to greater use of ETFs is under-standing these products.

A recent survey of adviser and investor attitudes towards ETFs carried out by Morning-star shows that 77 per cent of investors would not consider investing in ETFs due to a lack of knowledge. The figure for advisers is 67 per cent.

Morningstar associate director of European ETF research Bradley Kay says: “We were struck by the split between those respondents who really need more inform-ation about ETFs and those already familiar with the product key features. Yet even among active investors, we found that ETFs are being used in quite a passive way, for example, to overweight in a particular asset class and with infrequent trading thereafter. In all, it would seem that ample room remains to engage investors and advisers on this investment option.”

Mistry says there is a lot of work to be done for the ETF market to reach its potential. He says: “It will require education by providers and struc-tural changes such as fund supermarkets listing ETFs before these products are genuinely mass-market.”

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