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ETFs have democratized investing, but they haven’t democratized financial and ETF literacy.


Several years ago, I was meeting a friend at a packed coffee shop when the conversation veered into a slightly heated debate over whether the average person knew what an ETF was.  My stance was that few people were familiar with the investment product.  After becoming emboldened by one too many cups of coffee, I decided to settle the argument by approaching unwitting customers at nearly every table and simply asking “Have you ever heard of an ETF?”.  The result?  Not a single person had any idea what I was talking about.  Not one.  Zero.  An investment vehicle with so many potential benefits was unknown to everyday people.  The year was 2011.

Fast forward to several weeks ago where I found myself in a brief conversation with an individual trader at the Inside ETFs conference.  ETFs have grown-up since 2011, with U.S. assets rising to nearly $4 trillion from $1 trillion eight years ago.  Surely, everyone knows what an ETF is, right?  Well, that trader politely conveyed that ETF geeks like myself operate in an echo chamber and the ETF industry needs to do a better job of bringing our message to everyday investors.  That interaction left an impression on me and the more I thought about it, the more I realized she was right.  In our cozy, little industry circle, we toss around terms like strategic beta, factors, ESG, expense ratios, and creation/redemption with the assumption everyone knows what these are.  We all like to talk about the mainstream adoption of ETFs and the wonderful innovation and how great ETFs are for investors.  But, guess what?  49% of people don’t even know what an index fund is!  Have you ever heard anyone say “EFT” rather than “ETF”?  If I had a nickel for every time.  ETFs have democratized investing, but they haven’t democratized financial and ETF literacy.

A lack of education is a significant problem as ETFs continue pushing into the mainstream.  If investors don’t understand ETFs, they won’t use them and may forego potential benefits like lower costs, tax efficiency, portfolio diversification, transparency, and trading flexibility.  Other investors might not understand ETFs, but still decide to use them… incorrectly.  Another group of aspiring ETF users might be scared away from ETFs due to sensationalized, negative ETF stories in the financial media (see here for “exhibit A”).  All are bad outcomes for investors and the ETF industry.

Every week,’s Dave Nadig fields questions during a live online chat.  There aren’t five people walking the face of the earth that know more about ETFs than Dave does.  The topic of ETF education came up:

Dave is right.  Because ETFs are now more commonplace, there’s a risk the industry simply assumes investors understand them.  ETFs are at a unique point in their lifecycle.  On one hand, ETFs have been around for 25+ years and there’s no question more investors grasp ETFs than did in 2011.  On the other hand, ETFs still feel so new and innovative.  They’re like a game-changing technology that people are just realizing exists.  The industry is evolving in such swift fashion, it has drawn comparisons to Silicon Valley.  While the innovation is exciting, it’s also a doubled-edged sword.  Investors can now build portfolios in a multitude of ways. They can also inflict damage on their portfolios in a multitude of ways.  Which brings us back to ETF education.

In order for investors to achieve the best outcomes, ETF education is critical and something every one of us in the industry needs to take more seriously.  That starts with improving ETF knowledge within the industry.  In a recent survey of PROFESSIONAL U.S. investors, 13% said they don’t fully understand ETFs and 17% don’t know how to pick ETFs!  Who are professional investors according to this survey?  Institutional investors, financial advisers, and fund managers.

Cerulli surveyed financial advisors who currently do not use ETFs and found the single biggest factor that would drive greater use is… more education.

If people within the financial services industry don’t fully understand ETFs, how can we expect individual investors to appreciate them?

There is no question a larger issue is at play as well.  The education gap for both industry professionals and individual investors isn’t limited to ETFs.  Our country has a significant financial literacy problem.  If someone doesn’t understand the basics of personal finance, they simply aren’t going to understand ETFs.

Investment News recently surveyed financial advisors on the topic of financial literacy and found that 78% strongly agree it’s an issue in our country, but only 41% are doing anything about it.


It’s time to change.  Everything.  The ETF industry needs to focus education efforts on both advisors and individual investors.  Investors need help if you want them to learn about your multifactor ETF.  Some of the smartest individuals I have ever met reside in the ETF space.  But you have to be able to tell your story and educate.  Otherwise, all of the meticulous investment research, the ingenuity, and the innovation is for naught.

Advisors need to focus education efforts on end clients.  Put your money where your mouth is.  People have busy lives – work, shuttling kids to daycare, buying groceries, exercising.  That’s great if you can argue on Twitter about stock buybacks, the value factor, and quantitative easing.  What are you doing to help investors understand the most important building blocks of successful investing?

There’s tremendous opportunity for everyone – the ETF industry, advisors, and investors – to improve investment outcomes.  It begins with better education.  I could not be more excited about the future of ETFs.  To be clear, there are some excellent resources out there.  I would love to see more mainstream articles like this.  But we can do more.  We can do better.  I don’t have all of the answers, but my intention is to start a dialogue.  Everyone in the industry has an incentive to help solve this problem.  Investors still have trillions of dollars in ridiculously pricey annuities, “actively managed” (closet index) mutual funds, hedge funds and other investment products designed to enrich salespeople or fund managers.  That’s opportunity.  For all of us.