Millennials Are the 'Sweet Spot' in ETFs

Millennials have fallen in love with ETFs, and the contrasting markets over the past two years haven’t damped their enthusiasm for investing. 

According to the latest edition of the “ETFs and Beyond" report from Charles Schwab Asset Management, investors between the ages of 27 and 42 have emerged as the sweet spot for exchange-traded funds. 

“ETF investors have navigated two dramatically different market environments over the last two years, yet their approach to investing and affinity for ETFs has remained extremely consistent,” said David Botset, head of equity product management and innovation at Schwab Asset Management. 

“As we’ve seen historically, millennials take a unique approach to how they invest, and that holds true for their approach to fixed income, an asset class that has garnered a lot of attention,” he added. 

The latest version of the annual report, which was released Thursday in Philadelphia at the Schwab Impact conference, shows millennials leading the older generations of investors across four specific categories of ETFs. 

Millennials Lead ETF Charge 

The report shows ETFs as the investment vehicle of choice for 89% of millennials surveyed, compared with 78% of Gen X investors and 67% of baby boomers. 

As for the percentage of their personal portfolio allocated to ETFs, millennial investors averaged 37%, compared with 25% of Gen X investors between the ages of 45 and 58, and 21% of baby boomers between the ages of 59 and 77. 

In terms of plans to “significantly increase ETF investments in the next year,” 22% of millennials fit that category, compared with 10% of Gen Xers and 3% of baby boomers. 

When it comes to comfort and familiarity around ETF investing, 58% of millennials report feeling “extremely confident choosing an ETF,” compared with 41% of Gen X investors and 29% of boomers. 

The Schwab report is based on a survey take in June of more than 2,000 investors between the ages of 25 and 75. 

Fixed Income Favored

Beneath the top level of investor appetite for the ETF wrapper, the report shows an increased focus on fixed-income strategies, which again is being led by younger investors.  

The findings show that millennials are both more interested in learning about fixed-income investing and plan to increase their allocation to the category in the coming year. 

It is somewhat counterintuitive that millennial investors, who are the youngest category of survey respondents, have the largest average weighting in fixed income and the lowest average weighting in equities. 

As a group, millennials have an average fixed-income allocation of 45%, compared with 37% for Gen X and 31% for baby boomers. 

Equity Investing

On the equity side, millennials show a 55% average weighting, compared with 63% for Gen X and 69% for baby boomers. 

Schwab’s Botset described the breakdown of portfolio allocations against the backdrop of contrasting economic cycles over the past two years as “cooler heads” prevailing. 

Asked about adjusting investment strategies in response to market volatility, higher interest rates, inflation, recession fears and geopolitical unrest, survey respondents had about the same views as they did a year ago.

Cost a Top Factor

The report finds that cost remains the top factor when choosing an ETF and overall attraction for the funds remains high. Eighty percent of ETF investors agree that exchange-traded funds are their investment of choice. 

The overwhelming majority (95%) say they are likely to consider purchasing an ETF in the next two years, and about half say they have increased their allocations to ETFs in 2023. 

That said, ETFs as a share of portfolios has come down slightly from 33% last year to 29% in the latest report. 

The top three asset classes ETF investors plan to invest in over the next year are U.S. equities (55%), bonds/fixed income (47%) and real assets (43%). 

Most ETF investors (63%) believe the 60/40 portfolio is the right mix to meet their goals and their portfolios largely reflect that point of view, with 61% of their portfolios in equities and 39% in fixed income, on average. 

Contact Jeff Benjamin at [email protected] and find him on X at @BenJiWriter.