Tracker funds are cheaper and easier to understand than complex exchange traded funds (ETFs) that even financial advisers struggle to comprehend.
Around two thirds of financial and investment advisers told wealth management firm Skandia they had little or no understanding of ETFs.
As a result, the study revealed ETFs are a niche investment, with 70% of advisers admitting they have not recommended them to any clients, while ETFs make up 5% or less of the entire portfolios of clients who do invest in the funds.
Another reason why investors shy away from ETFs is a warning from the Financial Services Authority about a lack of understanding of how they work leading to misselling errors.
As a result, trackers are considered a better alternative for many investors because they are less complex and not so expensive as ETFs.
Tracker portfolios can cost 43 basis percentage points (bps) to put together, against a typical cost of 73 bps for ETFs.
Advisers with clients seeking passive investments like trackers expect take-up to remain low.
Skandia’s Graham Bentley said: “The structure of ETFs can be inherently complicated. It is therefore understandable that such a significant segment of advisers have little or no understanding of these funds and for the FSA to be concerned about their use in the retail space. With a general lack of understanding and increased scrutiny over the use of ETFs it is likely that demand for ETFs will remain limited even after the RDR and our research supports this.
“One of the benefits that have often been touted about ETFs is that they are a low cost passive solution. However, there are other ways for investors to access low cost passive investment solutions; a very effective way to do this is via tracker funds. These funds can not only be cheaper than ETFs but also are much simpler for both advisers and investors to understand making them a potentially much more appropriate passive solution for the retail space.”
