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Where ETF Investors Need Help

Paul Justice, CFA

Paul Justice: Hi, I'm Paul Justice, director of exchange-traded fund research at Morningstar, coming to you live from the ETF Invest 2011 Conference in Chicago. Today, I'm joined by the managing director of ETF research at Charles Schwab, Michael Iachini.

Michael, thank you so much for joining me.

Michael Iachini: Thanks, Paul.

Justice: I think that you've got a great deal of influence over investor activities within ETFs. Currently about 20% of advisor and individual investor assets are housed at Charles Schwab. So, it means that a lot of advisors are turning to you for some recommendations on what they should be doing. Could you tell us a little bit about the investor experience at Charles Schwab? How people are using ETFs and how you're helping shape that?

Iachini: Sure. So, investor use of ETFs at Schwab and everywhere else has been increasing certainly, and we know that lot of investors still have a ton of questions. So, we recently did a survey of about a 1,000 investors and found that about 44% of them do plan to increase their use of ETFs in the future; very, very few plan to decrease it. So, it's definitely an area where investors are moving into ETFs, but they still have a lot of questions. And that's where people like Morningstar and also us at Schwab come in to help answer those questions.

Justice: Great. So, what are some of the areas you're focusing on right now that you think that investors either need to have some awareness of the issues or just some more clarity? Are there some issues around ETFs that you think could use some light?

Iachini: There definitely are issues where investors are telling us they need more help. So, one is investors who are currently using ETFs tell us that one of their biggest problems is they are overwhelmed by choice. There are some many ETFs out there; how do we narrow it down? One of the answers that we've been working on is we have an ETF Select List, with 48 different categories, where we say "Here is an ETF that we like. It's high-quality. It's low-cost."

Another area that investors are telling us they need more help with is trading. How do I trade an ETF? What should I be thinking about? Market orders, limit orders, and so on. And there we try to come in to help them out with some articles. Here are some best practices for trading ETFs, and one of the things that we like to say there is consider using what's called a marketable limit order, for instance. It's an order that should get filled if the market doesn't move at a good price. But if the market does move unexpectedly, you're not going to end up paying an extremely high price for an ETF when you didn't really want to pay that much.

Justice: Right. I think one other area that advisors are especially migrating toward using ETFs is through a managed solution, basically another advisor that's helping them select that portfolio. Could you talk about some of the efforts at Schwab in building some of these portfolios and the research that you're doing to help that?

Iachini: Sure. So, in the group that I'm part of, Charles Schwab Investment Advisory, we do run portfolios for retail clients, not so much for advisors, that are called Schwab Managed Portfolios and one of those versions uses ETFs. Our basic approach is we're going to pick a good strategic asset allocation. So, it's a mixture of stocks and bonds, commodities, and some real estate with cash. And we then pick the right ETFs for each of those asset classes based on our view of which ETFs are high-quality and low-cost, but also we do look at where the market is positioned right now and where do we expect it to go. We then move around a little bit within the asset classes.

So, it's favoring certain sectors or parts of the bond market as market conditions change. And I think that a lot of investors who are more of the do-it-for-me type investor, they say, 'I don't really have the time or expertise to pick my own investments. I would like to hire somebody to help me out with that.' That's when we try to come in and help.

Justice: Great. This is an excellent evolution of both the ETF and the solution provided to the investor. Thank you so much for joining me today.

Iachini: My pleasure. Thanks, Paul.