The Markets

ETFs and Income Growing Components of Portfolios

Investors increasingly turn to income investments and exchange-traded funds (ETFs).
Reported by Alison Cooke

Investors considering ETFs most commonly have investment objectives of capital appreciation (57%) and building retirement savings (20%), according to an informal poll conducted on ETFConnect.com by Nuveen Investments. Bearing in mind the focus of the site where the information was gathered (self-described as “the most comprehensive industry gateway to Exchange-Traded Closed-End and Index Funds”), of investors looking to grow their retirement savings this year, 75% plan to use ETFs to achieve that end. Of those seeking income, 61% said they would increase their closed-end holdings.

Income investing is of growing importance to investors, the poll found: two-thirds of investors plan to maintain or increase their income investment holdings for 2007 and of those, 73% have identified or included capital appreciation, capital preservation, and income in the investment goals.

ETFs that facilitate broad-market and sector exposure along with liquidity and relatively low expense ratios, have especially stirred investor interest, the report said. Three-quarters who are looking for portfolio growth in 2007 said they plan to increase ETF holdings during the year.

Investment Discipline

Most investors admit they lack a disciplined approach to establishing their portfolio goals and tracking their progress, with two-thirds admitting they do not have a conventional investment policy statement (IPS), the report said.

Of the minority who do apply an IPS in their investment decisions, most use year-over-year total return averages to measure portfolio performance (61%). Those that don’t have a formal IPS also use year-over-year total return averages (51%) but are also likely to measure portfolio performance against personal goals (43%).

Most responding investors also seem to be examining investments with a consideration to tax treatment: 62% of investors diversified their 2006 portfolios to allocate up to 25% to taxable and tax-free income-focused securities across multiple product structures such as closed-end funds and open-end mutual funds, the poll found.