Mutual funds and exchange-traded funds, or ETFs, can often be relatively low-cost investments that allow investors to diversify their financial portfolios without having to do the research to pick individual stocks, bonds or other securities. And according to a new NerdWallet study, more than half of Americans (53%) say they’re currently invested in them. But others may be invested in these types of funds without even realizing it.
In an effort to learn about investors’ knowledge of the investments they hold in their portfolios, NerdWallet commissioned an online survey of more than 2,000 U.S. adults conducted by The Harris Poll. The results reveal that not everyone knows the names, or even the types, of investments they own. We also learned about what factors investors consider when choosing funds or individual stocks to invest in.
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Majority don’t know what they’re invested in: Less than half of Americans with workplace retirement accounts (43%) know all of the types of investments they have in these accounts. Just 38% of those with nonretirement investment accounts know all the types of investments they hold in these accounts.
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Some may not realize they’re invested in funds: More than half of Americans with workplace retirement accounts (53%) say they have exchange-traded funds (ETFs), index funds or mutual funds in their account, while the other 47% say they don’t or they’re not sure if they do. Because many workplace accounts only have funds as investment options, this may confirm that some just don’t know what’s in their accounts.
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Future potential and historical performance are prioritized when choosing funds: Among Americans who say they’re invested in ETFs, index funds or mutual funds, 44% choose funds to invest in based on future growth potential, around a third (32%) choose based on historical growth and 28% base their fund choices on those with low fees.
Most can’t name all investment types in their accounts
When picking investments, there are three main buckets to choose from: stocks, bonds and cash equivalents. Funds — like mutual funds or ETFs — hold a combination of investments, which may allow a person to diversify without putting in the time and money necessary to invest in the individual stocks of hundreds of companies. Diversification is key to reducing risk, because it means that even if a few companies you invest in underperform, the rest of your portfolio may offer some balance.
Fewer Americans with other retirement accounts (such as IRAs) and nonretirement investment accounts can name all of the types of investments they have in these accounts. Just under 2 in 5 of each of these account holders (38%) know all of the investment types within their portfolio.
Women are more likely than men to say they don’t know the types of investments they hold in their workplace retirement accounts and nonretirement investment accounts. More than 1 in 5 women with workplace retirement accounts (21%) say they don’t know any of the types of investments in these accounts, compared to just 13% of men. For nonretirement accounts, 28% of women who have those accounts say they don’t know any of the investment types in their accounts, while 19% of men say this.
We also surveyed Americans about whether they can name the different investments they own, like specific stocks and funds. Of those with workplace retirement accounts, 40% say they know all of the names, while 37% say they know some and the remaining 22% can’t name any.
About a quarter each of those with other retirement accounts (24%) and those with nonretirement investment accounts (26%) say they can’t name any of the investments they hold in these accounts.
Is it critical that you can rattle off the name of every fund in your investment account? No. But doing the research when you choose funds may help you pick a good mix of investments that align with your needs and goals.
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 on Charles Schwab’s website |
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Some may not realize they own funds in retirement accounts
A workplace retirement account like a 401(k) often has benefits over other types of retirement accounts, including higher annual contribution limits, funding through payroll deductions and perhaps even an employer match. But the downside is that there may be fewer investment options, usually limited to certain funds. Yet according to our survey, 47% of Americans with workplace retirement accounts say they aren’t invested in ETFs, mutual funds or index funds in those accounts or they aren’t sure if they are, which may indicate that some investors don’t know what they have in these accounts.
One common retirement savings investment is a target-date fund, which some investors may not know is a type of mutual fund. The “target date” is roughly the year a person plans to retire, and as that date approaches the fund shifts from investing more heavily in stocks to investing more heavily in lower-risk investments, like bonds. The fund focuses on growth when a person is younger and has more time to recover from market volatility, and then prioritizes stability once a person is near retirement.
Millennials (ages 25-40) and Gen Xers (ages 41-56) with workplace retirement accounts are more likely than Gen Zers (ages 18-24) or baby boomers (ages 57-75) with these accounts to report having ETFs, index funds or mutual funds in those accounts (63% and 67%, compared to 33% and 38%, respectively).
Just a third of Americans with nonretirement investment accounts (33%) say they have ETFs, index funds or mutual funds in these accounts. Close to 2 in 5 Americans with retirement accounts outside of their workplace (38%) claim to have ETFs, index funds or mutual funds in these accounts.
What investors should understand
Funds pool together money from investors to buy stocks, bonds or other assets to create a diversified portfolio that the average investor likely wouldn’t be able to replicate on their own. It’s like having your money in a large number of companies without needing to pony up the cash to buy into all of the companies separately. Before you choose the types of funds you invest in, it’s important to understand the differences between ETFs, index funds and mutual funds:
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Mutual fund: Typically managed by professionals with an aim to beat the returns of a benchmark, like the Dow Jones Industrial Average. Mutual funds might “beat the market” or underperform, but either way they are likely to come with higher fees for their active management.
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Index fund: A type of mutual fund that is passively managed and tracks an index, like the S&P 500. These tend to have lower fees than an actively managed mutual fund.
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ETFs: Similar to mutual funds and index funds, ETFs are baskets that hold diverse investments. Many ETFs are low-cost, passively managed funds. The main difference between ETFs and index funds is how they are structured and traded, and ETFs may be more tax-efficient, which could reduce the capital gains taxes you owe.
“For longer-term investors, index funds and ETFs are compelling because of their low cost,” Lam-Balfour says. “The less an investor pays in fees, the more they have left to invest and grow. However, there are instances where having active management may be preferable. For instance, other countries may have less transparency and regulation, so when investing in international stocks, an investor might prefer a mutual fund where the research team actively researches each company included within the fund.”
Growth, fees are priorities when choosing investments
According to the survey, among Americans who invest in ETFs, index funds and mutual funds, 44% say they choose their funds based on future growth potential and 32% say they choose based on historical growth, while 28% choose funds based on their low fees.
Close to 1 in 5 Americans who are invested in ETFs, index funds and mutual funds (19%) say they choose funds based on those recommended by loved ones, and 13% say they choose based on those discussed in the media. Almost a quarter of fund investors (24%) choose based on which funds are made up of companies or industries that align with their beliefs.
More than 3 in 5 Americans (61%) say they’re invested in individual stocks. Of them, 39% say they choose which stocks to invest in based on future potential growth and 34% say they choose based on strong historical growth.
Around 1 in 5 Americans who own individual stocks (19%) say they choose to invest in stocks from companies that align with their beliefs. Like with funds, some stock investors choose those recommended by loved ones (17%) or discussed in the media (16%).
Mutual funds and ETFs may be strong choices for a portfolio due to their easy diversification and low fees and time commitment.
ETFs often are passively managed and tend to have lower fees than traditional mutual funds. In addition to looking at the expense ratios, check to see if the ETF purchase will be commission-free. And with any type of fund, while past performance doesn’t guarantee future gains, it might be helpful to compare it with the performance history of similar funds.
