The availability of exchange traded funds has increased rapidly in line with the popularity of the product. One reason plays the dominant role in the selection of fund.
Exchange traded funds have become popular with investors because they can be easily bought and sold, as they tend to be tax-exempt and because they give access to far-away markets about which investors don’t know much.
Buyers tend to choose ETFs on the basis of a few readily measurable criteria. The cost of the product is the most important factor for selecting an ETF, according to a study among 400 ETF buyers conducted by Vanguard, the U.S. asset manager. Almost one in five buyers mentioned this criteria as the overriding consideration.
Liquidity a Key Criteria
Liquidity and tracking error are criteria in second and third place. Liquidity is important for buyers, because it is a measurement of how easily an investor can get rid of the product in times of crisis. The tracking error is the measurement for how closely the ETF mirrors the index.
Not all prejudices held in the financial markets against the product seem completely wrong however. German investors for instance are frequently labeled price-sensitive – the study confirms this anecdotal view.
German Price Considerations
German buyers are the most price-sensitive across all markets, with 38 percent mentioning costs as their main criteria of selection, said the authors of the study.
In Italy, Switzerland and the U.K. buyers look mainly at measurable qualitative identifiers and also at what index they mirror.
