Tags: investing | index funds | ETFs | risk

Natixis: Investors Don't Understand Risks of Index Funds, ETFs

Natixis: Investors Don't Understand Risks of Index Funds, ETFs
(Dollar Photo Club)

By    |   Tuesday, 24 May 2016 01:59 PM

Most investors don’t understand that they could be setting themselves up for losses by mistakenly thinking that index funds and exchange-traded funds are safer than they are, a survey shows.

More than three-quarters of investors say these funds are a less expensive way to invest, but 71 percent also believe they are less risky, according to a survey by Natixis Global Asset Management.

“The findings suggest that many investors have expectations that do not reflect a full understanding of the risks of index funds versus their benefits,” according to Financial Adviser magazine, which cites the study. “In addition, 64 percent of investors think using index funds will help minimize investment losses, 69 percent think index funds offer better diversification, and 61 percent believe index funds provide access to the best investment opportunities in the market.”

Natixis recommends that investors don’t get complacent.

“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia, says in a statement. “Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blind-side investors during volatile markets.”

 Stock market returns in the past year have been driven by dividends, not earnings, which have declined for many companies, especially in the energy business.

Companies that are paying dividends are also posting better gains, according to strategists at Jefferies LLC.

"U.S. indices whose constituents show increasing dividend payments over time have sharply outperformed since the beginning of the year," equity strategist Sean Darby at Jefferies writes in a report obtained by Business Insider. "A scarcity of 'dividend growth' globally, combined with flattening G7 yield curves, has put a bid on 'U.S. dividend growth stocks,' in our view. U.S. real bond yields have also fallen since November 2015 underwriting income generating stocks."

The S&P 500 index is down 2.5 percent from a year earlier, when it reached a record high of 2,132.82. Since then, it has had two declines of more than 10 percent, or “corrections” in Wall Street parlance, as global growth cooled and oil prices touched 13-year lows before rebounding.

The dividend trend may not be as strong this year, though.

“Dividend payment increases were hot in 2015, with announced dividend payouts rising 10.6 percent year over year. And the companies that jumped on this train were rewarded,” Business Insider says. “Dividend payments increases, however, are expected to drop to just a 4.2 percent year over year growth rate in 2016.”

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Most investors don't understand that they could be setting themselves up for losses by mistakenly thinking that index funds and exchange-traded funds are safer than they are, a survey shows.
investing, index funds, ETFs, risk
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2016-59-24
Tuesday, 24 May 2016 01:59 PM
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