Nathan Geraci is President of The ETF Store, Inc. and host of the weekly radio show “The ETF Store Show“.
A recent Charles Schwab ETF investor survey found that Exchange Traded Funds are playing an increasingly important role in investors’ portfolios. While this comes as no surprise, the survey highlighted some notable differences in the use of ETFs across generations – in particular, with Millennials. From the Schwab press release:
“The prominence of ETFs within an overall investment strategy is particularly pronounced among younger ETF investors. Millennials (aged 25-35) say that ETFs currently make up an average of 41 percent of their portfolios, compared to a 21 percent share among all investors. Sixty-one percent of Millennials plan to increase their investments in ETFs in the next year. And, Millennials think the future of ETFs is bright. Seventy percent of Millennials see ETFs as the core investment type in their portfolio in the future. Significantly, 77 percent say they would consider using stock-based ETFs instead of individual stocks in their portfolios and 69 percent would consider using fixed income ETFs instead of individual bonds.”
While all generations are increasing their use of ETFs, Millennials are clearly leading the charge. Given that potential ETF benefits such as transparency, liquidity, diversification, and low cost apply equally to all investors, this proves to be somewhat of an interesting case study. Why are Millennials gravitating towards ETFs at a faster pace?
To answer that question, consider why Millennials are flocking to iPhones or Uber or Airbnb. These are game-changing technologies, with convenience, lower costs, and functionality at the core of their value proposition – exactly what Millennials want and expect from their products and services. Uber and Airbnb, in particular, are completely disintermediating traditional industries (Uber with the taxicab industry and Airbnb with hotels) because Millennials see greater value than with the status quo. iPhones and iPads offer a much more economically viable and convenient option than buying a full-blown computer (1 in 5 Millennials no longer use a desktop computer to go online), not to mention all the bells and whistles that come along with them.
Similarly, ETFs are disrupting the traditional mutual fund business and it is no coincidence that Millennials find ETFs compelling. Recently, wealthmanagement.com wrote the following regarding Millennials and ETFs:
“The ETF is actually something of a Millennial itself, having turned 25 earlier this year and come of age during the era of the Internet, mobile computing and social media. So part of the appeal of ETFs for the Millennial crowd might be that, for a generation accustomed to broadcasting their personal lives to the world, the transparency of ETFs is appealing. Or it could be that growing up at a time when information is instantaneous, global and ubiquitous, young investors now seek to broaden their reach across countries, sectors and asset classes, which ETFs provide. Or it might be that in a culture of instant gratification, Millennials appreciate the intraday liquidity of ETFs.”
This piece also went on to highlight the low costs of ETFs as appealing to the frugal mindset of Millennials. Millennials and ETFs might just be the perfect match for each other.
So what does this all mean? Well, for one, expect ETFs to continue growing at a record pace. Millennials now comprise the largest generation in the country, at some 80 million individuals. As Millennials’ incomes and wealth increase, expect ETFs to grow right alongside. More importantly, for other generations who are not currently investing in ETFs – Traditionalists, Baby Boomers, and Gen Xers, the time has come to ask “why not?”. Technologies advance, society progresses. There is a reason why we no longer ride around in horse drawn carriages or watch black & white TVs. We evolve, we find better ways of doing everyday things. It is no different with investing. Traditional mutual funds, as we know them today, were formed all the way back in 1940. Obviously, a lot has changed since then. Millennials tend to be the earliest adopters of new technologies. Millennials have a knack for identifying products and services offering the most value. Millennials are not afraid to embrace change, if that change is positive. According to a recent BlackRock investor survey, Millennials feel most optimistic about their financial future compared to other generations. Perhaps, that is because Millennials have embraced ETFs.
For additional color on this topic, we recently welcomed Charles Schwab Managing Director Mike Savage onto The ETF Store Show to discuss Millennials and their attitudes towards investing and saving. Listen here.
