ETFs Try to Woo Individual Investors
After first scoring a hit with Wall Street traders, then with financial advisers, fund companies that market exchange-traded funds are reaching out to an even wider audience: individual investors who trade for their own accounts.
ETF ads have been cropping up in surprising places, including on TV during college football games and in subway cars in New York City.
Firms have also expanded advertising into personal finance magazines geared to mom-and-pop investors, such as Time Warner's Money and Kiplinger's Personal Finance, as well as titles for general, if affluent, readers, such as The New Yorker.
While it is difficult to tell whether these efforts are gaining traction, anecdotal evidence, as well as increased ETF trading volumes at some discount brokerages where professionals are unlikely to make trades, suggest that they are.
Main Street represents a big opportunity for ETF firms. Individual investors -- working through professional financial advisers -- are already responsible for much of the extraordinary growth ETFs have shown over the past few years.
ETFs offer individual investors and professionals alike the ability to invest in an index that can be traded during the day, unlike index mutual funds. ETFs are securities that track an underlying benchmark much like an index mutual fund, but trade like a stock on an exchange.
But they also carry some risks. Among domestic ETFs, assets of sector funds have grown more rapidly in recent years than those of broad-market funds. These narrowly focused funds, if not used sparingly in a portfolio, could hurt novice investors if the funds stumble.
In addition, ETFs can be more expensive than traditional index funds for investors who buy ETFs in small quantities over time, because investors pay a trading commission every time they buy and sell ETF shares.
"Each investor has to do the math to find out what's appropriate," said Tony Rochte, senior managing director at State Street Global Advisors, a unit of State Street.
Retail investors -- most often coming through financial advisers -- now account for about two-thirds of new money flowing into ETFs, said Andrew Arenberg, director of marketing for iShares, the ETF unit of Barclays. That proportion has grown in recent years. New money from individuals investing without financial advisers accounts for about 10% of overall inflows, Arenberg estimates.
ETF companies often steer investors through financial advisers, much the way drug companies advertise prescription drugs to patients even though they can only get the medication through their doctors.
One ad by Barclays, placed in a May edition of New Yorker magazine, read: "You know how some people have that certain something? This is that certain something."
In smaller print toward the bottom, the ad read, "iShares" and "Talk to your adviser."
Barclays also sponsors Cirque du Soleil, a highbrow circus.
"It's not Ringling Brothers," Arenberg said. "They have clowns, but it's a very sophisticated clowning experience."
The chief ETF rival to Barclays, State Street Global Advisors, has also been targeting individuals. State Street recently took out advertisements in Kiplinger's and Money promoting its Midcap SPDR ETF, which owns a broad portfolio of middle-sized company stocks.
The firm also bought television ads during last season's Rose, Cotton, and Sugar college bowl games, as well as some pro-football playoff games. The football ads promoted a re-branding that included many of the firm's narrower sector funds.
Rochte said the television ads were aimed primarily at financial advisers. But they create "awareness" among individual investors, Rochte said, who "can use it on their own" or go to advisers.
Print ads for Select Sector SPDRs, sector funds distributed by Alps Distributors, have appeared on commuter trains and PATH rail cars, which run between New York City and New Jersey.
The Sector SPDRS break the S&P 500 into nine different industries. While they aren't the narrowest funds on the market, they can still be more volatile than broad market index funds.
"Historically we have tried to attract institutional investors and financial intermediaries," said Dan Dolan, director of wealth-management strategies for Select Sector SPDRs. "We've dug a little deeper in recent years to attract the ultimate investors."
Dolan adds that the train ads were unique to the New York area, targeting people who work in lower Manhattan, the nerve center of the financial-services industry.
Discount brokerage TD Ameritrade Holding said ETFs now account for 7% to 8% of the daily trading volume at its self-directed brokerage, which excludes advisers. That is up from less than 2% in 2005, adjusting for its acquisition of TD Waterhouse last year.
Another brokerage, ShareBuilder, which specializes in automatic investment plans as well as catering to frequent traders, said ETFs represent about 23% of its overall account balances, up from 16% in 2004. The closely held firm claims two million customer accounts.
Vanguard Group said ETFs represent 10% to 15% of Vanguard Brokerage Services accounts, which cater to individual investors rather than financial advisers.
E-Trade Financial recently added two Internet tools for individual investors: an ETF screener and a calculator that compares ETF and mutual-fund expenses.