Despite many lingering questions about the product, exchange-traded funds have “risen from obscurity to an increased level of prominence” since their 1993 launch, Deloitte says.

The consultancy says ETF growth is due in part to the favorable fee structure of these funds, as well as their tax efficiency and transparency.

An October 2013 Charles Schwab study found that half of investors surveyed plan to increase their ETF holdings over the next year — a 22% increase over those who made the same prediction in 2012.

Part of the growth has come as financial planners move to fee-based models from commission-based. As ETFs do not have sale charges, advisers can directly charge their clients for advice, rather than by transaction, says Jim Rowley, a senior strategist in Vanguard’s investment strategy group.

Yet, underlying concerns remain with the product, explains Michael K. Smith, president of Plexus Financial Services in Chicago. Most of the concerns are based in large part on a general lack of understanding of what these funds are.

“Because of the way in which [ETFs] are traded, some express concern or fear that including one into their fund lineup will promote more ... day trading within your 401(k) plan,” Smith says. “From a self-directed plan prospective, that’s the participant’s right, but an employer raises concerns about” employee productivity, since the trades would take place during the workday if the employee chose to do their own trading.

At TD Ameritrade, Matthew Judge, director of wealth management for institutional clients, says that they are seeing more advisers using ETFs, but there is a learning curve for them to get up to speed on the products; “So advisers need to be aware.”

Education, outreach

Smith says that the level of sophistication required for this product may make it not suitable for a vast majority of the employee population. He believes, for some, it presents too much fear of the unknown and too much risk.

But, to overcome those fears, as with any retirement tool, advisers and companies should turn to education and outreach, Judge says. “We put out as much education as possible,” Judge adds. “It’s up to the adviser to know what products they are offering” and convey the content to their clients. 

The Schwab study found that 31% of investors said they need to know more about ETFs in order to invest more in them. The investors in the study were most focused on learning about their tax implications and how to use them in a portfolio.

Smith believes education and outreach will lead to more interest from plan sponsors and financial advisers in potentially incorporating them into 401(k) plans.

“ETFs have a very favorable future,” he says. “There can be a place for them within corporate retirement plans as people become more familiar with them and understand them better.”

Beth Flynn, vice president of ETF platform management at Charles Schwab, adds in a white paper that we are seeing less discussion of if and more about how investors will buy and use ETFs: “We’re seeing an upward shift in sophistication among ETF investors, and a hunger to learn more.”

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