Dean Anderson, the NZX's Smartshares product manager - New Zealand's only local ETF provider - says at least half of its ETF investors in the past six months are new to the exchange.
Smartshares offers 23 ETFs, ranging from funds that cover the top 50 NZ shares, or the 500 biggest US companies, through to those which invest only in a specific sector.
Anderson believes the rise in ETFs is being driven by greater media coverage and the growth of KiwiSaver.
"KiwiSaver has helped."
NZX-owned KiwiSaver provider SuperLife invests in ETFs, as do other KiwiSaver providers such as Simplicity, which uses Vanguard funds, and ASB, which invests using BlackRock - both big players in the global ETF market.
Bart Frijns, a finance professor at AUT University, believes that for people piling into ETFs, cost is a key issue. "I think the simple answer is: they are cheap," he says.
"They are tools that give very easy access to a broad investment strategy at a low cost."
Most ETFs invest using index tracking - a way of using computer algorithms to invest in a certain group of securities, such as shares, bonds or commodities.
They can run at virtually no cost - so the managers can offer them really cheaply.
In the US, ETF fees are as little as 0.1 per cent of the funds under management, while New Zealand fees average around 0.5 per cent.
On the other side are actively managed funds which use analysts to research potential investments and make decisions on where to put their money.
Frijns says the shift to ETFs is also being driven by the public questioning whether a lot of the active funds can beat index funds.
"Why pay 1.5 to 2 per cent in fees when it doesn't pay off?" he asks.
"Some have good years and some have bad years," he says of actively managed funds.
"The thing we consistently see is no outperformance and I think people are catching on to this."
Frijns says it is impossible for investors to predict which manager or fund is going to perform and which ones weren't, from year to year.
Local active managers, however, say that might be the case internationally, but not in this country.
Matt Goodson, chief executive of active fund manager Salt Funds Management, says historically, whichever period you choose, active New Zealand fund managers have outperformed passive funds.
"That is an unusual thing for a market," he says.
Goodson says ETFs in themselves can be a very efficient way for individuals to invest in the market. "It can be a very efficient way to access an asset class."
But he warns that as passive ETFs become an ever greater share of the market, there are also greater systemic risks.
Goodson asks what would happen if the market took a dive and the index-tracking ETFs all have to sell at once.
"What happens if there aren't enough buyers on the active side?"
"When is too much passive too much of a good thing?"
He doesn't know the answer to that, and says it isn't an issue for the New Zealand market, but he points to distortions created by big global ETFs investing in listed companies here.
Goodson cites the case of Sky TV, which last year had a big surge in its share price after a big global ETF investor bought in through its dividend fund.
"Its share price went through the roof and it was nothing to do with fundamentals."
NZX's Anderson is well aware of the concerns about growing investment in ETFs.
But he doesn't accept any concerns that this growth is pushing the market towards a bubble.
I think the simple answer is: they are cheap.
He says when it comes to the S&P index in the US, the percentage of assets in ETFs is less than 3 per cent of the whole market, while in New Zealand it is just 0.5 per cent.
He says ETFs don't determine pricing in the market.
"The markets are not driven by index funds."
Anderson also smooths away concerns about investors cashing out en masse if there is a market downturn.
"Last year there was a bit of a small correction. We saw hardly anyone sell out."
He admits the market hasn't seen anything on the scale of the global financial crisis since investors started pouring into ETFs.
But he believes investors are in it for the long haul with 80 per cent of those getting in signing up for regular savings plans. "They have got the mindset to deal with the ups and downs."
However, financial advisers appear cautious of ETFs.
Clayton Coplestone at Heathcote Investment, who provides advice to both financial advisers and institutional investors, says while he is not opposed to the idea of ETFs, his biggest concern is about the amount of money being thrown at the sector without considering investment fundamentals.
"Many industry participants have become complacent as markets have been stimulated by the excess liquidity provided by the world's central bankers.
"With many financial markets richly priced, we remain highly sensitive to the weight of money that continues to chase these gateways, and strongly encourage our audience to select investment managers who adopt a disciplined approach to appraising investments."
He says if the sole reason people are investing in ETFs is for their price, then they should be considering those that charge less than 0.1 per cent to get index exposure.
"But beware, as you will get what you pay for, with no downside protection when the markets correct. I'm not convinced that the minor price savings will outweigh the loss in capital when markets correct."
Coplestone says while the weight of money pouring into the funds is often presented as an argument for using them, promoters seem blissfully unaware of the same argument working against these vehicles in times of fear.
"If ETFs start to sell, who is left to buy?"
Deborah Carlyon, a financial adviser with Stuart Carlyon, uses ETFs as part of an overall strategy for her clients.
She says that as the number of funds available has grown exponentially, one of the challenges has been choosing the right one.
"There are a plethora of ETFs and choosing the appropriate one has become harder for the investor."
Carlyon says one of the risks of sharemarkets being at all-time highs is that ETFs can end up buying shares in large companies that may be overpriced compared to their profits or book value.
"If trading at higher prices, the share prices may fall in the short term, following company profit announcements or market sentiment changing."
For that reason, she says it may be better to use ETFs that focus on smaller companies or value companies - which may be less affected in a downturn.
She says at the end of the day, it's how an investor's total portfolio is put together that matters.
"A portfolio should be constructed for the investor's goals and objectives and shouldn't be overexposed to any one market nor any single investment vehicle."
Steven Barton, a financial adviser at Pascoe Barton, also believes you get what you pay for when it comes to ETFs.
"If you look at the New Zealand sharemarket, if you bought the NZX50 you end up with a lot of rubbish in there too."
He says it is all too easy for the likes of Fletcher Building - one of the largest companies on the NZX - which has had poor performance lately, to pull down the whole index.
And he points to Telecom when it was under Teresa Gattung's leadership and its value took a big dive.
Barton says it is also very hard to find out exactly what is in an index.
"I wouldn't recommend any in New Zealand," he says.
He points to the performance of active fund managers and says many of them do beat the relevant index, even after their higher fees are taken into account.
"I think if you look at the Australian research - Australasian managers do outperform the index."
He believes it is younger people who are behind the ETF drive.
"I think most of it may be coming from younger people. They often don't have a lot of money to invest. They wouldn't have enough to buy individual stocks to get diversification."
He says there is a real danger that some of those investors will underestimate the potential risks.
If markets fall across the board and people pull out of an ETF they could take a hair-cut.
"There are always going to be problems with do-it-yourself investors."
Barton says people need to be wary of their investment timeframes and how much risk they are prepared to take on.
"It sounds exciting when the property market is flat and the international sharemarket is doing well and a term deposit in the bank is barely paying 3 per cent - but they are really different animals."
John Hawkins, chairman of the New Zealand Shareholders Association, says like any investment, people need to think carefully about whether an ETF meets their risk profile.
Some ETFs invest in volatile and narrow sections of the market, he warns, and there are also potential currency risks investing in those listed on overseas exchanges.
"People need to think about the outcomes they want."
He says investors should think about making sure they don't put all of their money into one ETF - spread it to different assets classes and geographies.
"Remember, the sharemarket is always volatile. Prices always go up and down."
But he says mum and dad investors should take heart from the fact that KiwiSaver funds put a lot of money into the sharemarket, including ETFs.
And that over the longer term, shares do perform better than cash in the bank.
"Time is your friend."
He says investors can also take other precautions, such as using a broker that is well-known and only investing in a regulated market.
"That way you have some comeback if something goes wrong."
David Boyle, group manager, education, at the Commission for Financial Capability,
says ETFs are just another option for investors to consider but it's really important that people understand how they work and get some advice on investing in them.
"These genuinely are long-term investments." That means five years-plus.
Boyle says investors need to understand the risks as well as the returns. Many ETF investors will have yet to see a full market downturn.
"That is where the rubber hits the road," says Boyle.
"They can be good things but they might not be good for everyone."
Why I got into ETF investing
Walter Todd began investing in exchange-traded funds about three months ago and puts in $15 a week.
The 19-year-old student, who is part-way through a conjoint Commerce and Law degree at Wellington's Victoria University, says he was exposed to share investing through his parents.
"My dad owned shares and he bought some shares in my name."
The experience has been positive so far, with Todd able to sell some of his shares in accounting software company Xero to help pay his university fees.
Todd became interested in ETFs specifically after reading Tony Robbins' investment book Unshakeable, where he read that over the longer term, ETFs beat 80 per of active fund managers - those who pick individual shares or bonds to invest in.
He says the gist of it is about a low cost investment which should give higher returns.
At the same time, Todd says he was looking through his KiwiSaver investment options and came across Simplicity, which invests in Vanguard ETFs, which he signed up to.
Todd belongs to the investment club at Victoria and through that he heard about investment platform Sharesies, which allows users to put relatively small amounts into funds.
"I looked into it and it looked legitimate."
Todd admits that as a student, he doesn't have a lot of spare cash, but is willing to give up a few beers to put in $15 a week. So far he has invested in three ETFs.
He says his investment is for the longer term - 20 to 30 years - and he may use the money for a deposit on his first house or for retirement.
"I don't want to have any more money in KiwiSaver than I need to because it is locked up."
Todd sees the investment as a bit extra on the top, and also as a way to become better educated about how investing works.
He knows that at some point, the value of his investment will probably fall.
"After reading Unshakeable, it is highly likely these returns will go down."
But even if that happens, he plans to keep on investing. "I have a long term vision for this."
In some ways, he says he is looking forward to seeing the market fall, to find out how he copes with it mentally.
"I am sure I will be tempted [to sell] - it's natural. But the only way to realise your loss is to pull it out."
His decision to invest in ETFs which track an index doesn't mean he is opposed to investing in an active fund, he says.
But he says he would have needed to do much more research to find a manager he could trust, and would have needed more money upfront to begin investing.
He says Sharesies has made it affordable for people like him to invest in ETFs.
"I am a bit of an advocate for it - the benefits of putting a little bit away regularly and compounding the return."
