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The ETF Generation Gap

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A generation gap has emerged in the usage of exchanged-traded funds. According to Schwab’s 2015 ETF Investor Study released today at Morningstar’s ETF conference being held in Chicago. ETFs account for 41% of the portfolios of millennials compared with just 17% for boomers.

Moreover, 61% of millennials surveyed expect to increase their ETFs holdings next year compared with just 25% of boomers. The gap is even greater when looking at the role that ETFs play in their respective portfolios. Seventy percent of millennials view ETFs are a core investment vehicle in their future portfolios, while only 17% of boomers do.

“Millennials are doubling down on ETFs,” says Heather Fischer, vice president of Schwab’s ETF Platform, who spoke with ThinkAdvisor at the Morningstar ETF conference. Since millennials tend to be new to investing with a clean slate, they’re open to the latest new types of investment products, Fischer explained.

The Schwab study found that ETFs are becoming more popular among investors overall, comprising 21% of portfolios currently, up from 10% in 2012, and usage is expected to grow. Investors surveyed anticipate that ETFs will account for 25% of their portfolios in the next five years, and 34% expect ETFs will become a core part of their future portfolios.

“In the five years we’ve conducted this survey, we’ve witnessed an evolution in how investors think about the role that ETFs play in their portfolios,” said Fischer in a statement.“More investors are viewing ETFs as the foundational component of a well-diversified investment portfolio, and we think that sentiment will continue to grow.”

In addition, more investors are expected to use ETFs in ways that differ from their conventional use as an index substitute. which predominates today. Sixty-one percent of investors surveyed, for example, said they would consider using stock-based ETFs instead of individual stocks in the future, and 55% said they would consider substituting fixed income ETFs for individual bonds. The numbers for millennial were even higher: 77% and 69%, respectively.

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ETFs, composed of multiple securities in an index, offer more diversification than individual securities, and an increasing number also offer more nuanced portfolios such as currency-hedged exposures and weightings that are not based on capitalization but on other factors such as value and momentum.

These so-called strategic beta ETFs now number 844 in Morningstar’s database, up from 673 a year ago, with almost $500 billion in assets, according to Morningstar’s just published Global Guide to Strategic Beta Exchanged-Traded Products, released today.

They account for just over 21% of U.S. exchange-traded product assets and about one-third of new ETF cash flows, and their fees are declining. Goldman Sachs recently launched a U.S. Large Cap Equity ETF (GSLC) with an introductory fee of 0.09% after some waivers.

Lower fees could attract more investors. Forty-one percent of investors surveyed by Schwab believe commission-free ETFs are a “game-changing development.”  Of the 1,600 ETFs Schwab offers, 214 are commission-free, covering 66 Morningstar categories, and that number is expected to grow, says Fischer.

The 2015 ETF Investor Study was based on an online survey of more than 1,000 individual investors between the ages of 25 and 75 with at least $25,000 in investable assets who have purchased ETFs in the past two years.

— Check out Majority of Advisors Use Smart Beta (Whether They Know It or Not): Russell on ThinkAdvisor.