It’s no surprise that ETFs are the product of choice for millennials, at least not to Charles Schwab, whose 2018 ETF Investor study released in mid-June showed 96% of millennials surveyed see ETFs as a necessary part of their portfolio.
“It’s a trend we’ve seen with millennials, but the surprise is how the numbers continue to trend upward to the point that when millennials think investing, they think ETFs, which are becoming synonymous for that generation,” said Kari Droller, Schwab vice president of third-party platforms for mutual funds and ETFs.
The annual study, which Schwab has done for eight years, is to get a sense of how customers are engaging with and sentiments around ETFs, she said. As a comparison, while 91% of millennials strongly or somewhat agreed that ETFs were their investment vehicle of choice, that number dropped to 80% of Gen Xers and 54% of baby boomers surveyed.
The online study of 1,500 ETF investors found 55% of all participants expected ETFs to be a primary investment in their portfolios in the future. Millennials stated that at least 40% of their current portfolios were made up of ETFs — more than any other generation — with almost 80% stating they expected to grow that in the future. Further, millennials were the largest segment to replace individual securities with ETFs in their portfolios.
The study also found that overall, investors remain positive on ETFs in periods of market volatility, with 83% of respondents stating that ETFs provide them with flexibility to react to short-term market swings and 73% stating they were more interested in exploring smart beta ETFs during market volatility. Sixty-seven percent allocated more to ETFs and 60% buy and sell ETFs more frequently during periods of market volatility. These numbers are higher for millennials.
Technology is fueling growth in ETFs, Droller told Investment Advisor, and is why millennials are more apt to use ETFs. In fact, 25% of all investors use either robo-advisors or portfolio-building tools in self-directed accounts.
The most surprising finding in the study, Droller said, was gender differences. Men and women were “pretty closely” aligned in the amount of ETFs used in the portfolio (about a third overall), the difference, she said, was in experience, where 46% of millennial male respondents were more apt to select ETFs for their portfolio themselves, verses 33% of women. A similar differential was across all generations, although boomers and matures were more likely to do their own selection or use an advisor rather than use technology.
The study also found that low expense ratio still was a key factor in selecting ETFs, with 95% of respondents saying it was extremely or somewhat important. Total cost, including commissions, expense ratio and bid/ask spread, was just as important. Also in the 90%-and-up zone in importance was how well an ETF tracked to its index, reputation of the ETF provider, and historical returns of the ETF.
In addition, the importance of commission-free ETF trading has grown over time. In 2015, only 18% of participants said commission-free ETFs were “most important” to them and they would move to a brokerage firm that offered them. Today that number has grown to 31%. Again, millennials were most adamant about commission-free ETFs, with 79% stating it was a most or very important factor.
Finally, investors were firm about not wanting additional fees, such as short-term redemption fees for selling an ETF within 30 days of purchase; 91% said this was extremely or somewhat important. Brokerages also needed to have a broad selection of ETF categories and providers.
Ginger Szala is executive managing editor of Investment Advisor. She can be reached at [email protected]