What Conservative Investors Are Missing With ETFs

Statistics indicate investors love exchange-traded products. U.S.-listed ETFs and ETNs topped $1.3 trillion in assets under management in December 2012 and the inflows have continued this year. In February, global exchange-traded products attracted $11.4 billion in assets,

. Through the end of February, global ETFs and ETPs raked in $49.1 billion in new assets with equity-based products accounting for the bulk of inflows with $45.1 billion, ETFGI said. That is good news for the ETF industry, but there is a cause for concern: So-called investors are showing some reluctance in embracing ETFs. "When asked about their investment preferences in the next 12 months, conservative and moderate investors said they are more likely to opt for mutual funds (86 percent combined) than more aggressive investors (54 percent),"

, a financial advisory firm

. The firm cited a recent survey conducted by Spectrem's Millionaire Corner that indicates investors with moderate or aggressive risk-tolerance profiles are far more likely to embrace ETFs than their conservative counterparts. Arguably, this scenario indicates conservative investors are not being properly educated about how they can also benefit from ETFs. Perhaps financial advisors that count risk-adverse investors among their clientele should highlight examples such as the following.

It can be argued that the Consumer Staples Select Sector SPDR, the largest staples sector ETF, is among the ultimate options for conservative investors. With an expense ratio of just 0.18 percent, XLP has annualized volatility just 10 percent and a beta of 0.63 against the S&P 500,

. By comparison, the Fidelity Select Consumer Staples Portfolios (FDFAX) charges a whopping 0.83 percent per year, a minimum investment of $2,500 and a redemption fee of 0.75 percent,

. All of that for a five-year return of nine percent. XLP has no redemption fee, no minimum investment and offers intraday liquidity. Over the past five years, XLP has offered better than quadruple the returns of FDFAX.

The health care sector is another favorite stopping point for conservative, cost-conscious investors and Vanguard certainly obliges them with VHT. VHT's paltry expense ratio of 0.14 percent is the lowest among health care sector ETFs. Said another way, the expense ratio on the Fidelity Select Health Care Portfolio (FSPHX) is more than 5.7 times the fees charged by VHT. And FSPHX charges the same pesky 0.75 percent redemption fee FDFAX does and has the same absurd $2,500 minimum investment requirement. For all those fees, investors get a mutual fund that has returned just 10 percent over the past five years with a turnover rate of 105 percent,

. On the other hand, the passively managed VHT has offered five times those returns over the past five years.

The iShares High Dividend Equity Fund is one of many U.S.-focused dividend ETFs that compete against the Income Fund of America (AMECX) issued by American Funds. Owning that mutual fund's "A" shares cost $632 per $10,000 invested over one year,

. Maybe some advisors can look past that because the Income Fund of America

.