According to a survey conducted by the American Association of Individual Investors; When it comes to use of mutual funds, Domestic stocks were far and away the most selected asset class group among the multiple options given. Almost every respondent using mutual funds (95%) as well as 85% of ETF holders said they use them to invest in domestic stocks.
Domestic bond exposure, conversely, was largely gained through mutual funds. Nearly two-thirds (66%) of mutual fund owners used them to get exposure to bond funds. This compares to just 34% of ETF owners.
By and large, we saw higher percentages of AAII members use mutual funds for a wider array of asset class groups than ETFs. One area where ETF usage stood out was for targeting specific sectors. Though the absolute number of responses was small, we saw far more members say they make use of sector-oriented ETFs than sector-oriented mutual funds.
On average, mutual funds accounted for 40% of respondents’ portfolios. ETFs accounted for 26% of their portfolios. This compares to a 31% to individual stocks and a 6% allocation to individual bonds. Behind those averages were wide ranges, with allocations from 0% to 100% for both mutual funds and ETFs.
Diversification was the top reason for using funds (31% of mutual fund owners and 21% of ETF owners). Simplicity, ease of investing and convenience were another common reason (12% of mutual fund owners and 17% of ETF owners). Low costs/expense ratios (18%) and tax efficiency (9%) were also among the key reasons given for holding ETFs.
The rationale given by one particular investor, was: “I want the core of my portfolio match market index performance.” He also liked the “low expenses, the ability to control the purchase and selling price and the lower tax costs.”
When asked specifically what determines the choice to use a mutual fund or ETF instead of buying an individual stock, diversification was also the top reason given (14% overall). Cost (12%), risk reduction (5%) and a desire to invest in sectors (5%) were also among the most common responses.
Performance and a low expense ratio were the top characteristics AAII members consider when choosing a fund. Both were listed by 74% of mutual fund investors.
A low expense ratio is given slightly more attention than performance when it comes to exchange-traded funds. Nearly 70% of ETF owners said they look for a low expense ratio, while 65% said they consider performance.
Risk and the volatility of returns was the third-most-commonly selected characteristic (44% of mutual fund owners and 37% of ETF investors). Though ETFs as a group have shorter return histories relative to mutual funds, a fund’s age was considered by proportionately fewer ETF owners (25%) than mutual fund.
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