Exchange-traded fund usage is more common among young investors than among older investors. That’s according to a survey undertaken by Cogent Reports, a division of research group Market Strategies International. The survey explores brand preference and product usage among affluent US investors, defined as those with investable assets exceeding $100,000.
The familiarity of younger investors with technology driven ETF services, such as robo-advisors and web-based portfolio management tools, have led to an increased adoption of ETFs among these generations.
The study found that so-called “Millenials”, those with birth dates ranging from early 1980s to early 2000s, and so-called “Generation X” investors, those born between the early 1960s and 1980s, represent 37% of affluent US investors but comprise a majority (55%) of ETF owners. Millenials were most likely to report owning ETFs (38% reported ETF ownership) followed by 21% of Generation X investors who hold such funds; these numbers were significantly different to second wave “Boomers” (only 14% reported ETF ownership) and first wave Boomers (only 12% reported ETF ownership) – collectively these two generations were born between 1946 and the early 1960s.
Commenting on the findings, Julia Johnston-Ketterer, author of the report and senior director at Market Strategies, said: “At present, there is an obvious advantage for established ETF providers that have a greater proportion of customers who are older, and therefore wealthier. But looking to the future, companies who do the best job connecting with younger investors who embrace ETFs are the firms that will likely see the most growth.”
The trend of younger investors increasingly adopting ETFs is partly being driven by new approaches used by younger generations to manage their investable assets. A study in June 2015 by Wells Fargo, a multinational financial services provider, found that only 16% of Millenials work with a financial advisor, about half the rate of the Baby Boomer generation. Also, younger generations tend to possess a greater awareness of web-based portfolio technologies, such as robo-advisors, which typically lean towards low cost passive investment funds such as ETFs. Wealthfront, a US-based robo-advisor, states that 60% of their client base are below the age of 35 while 90% are younger than 50.
Interestingly, the Cogent Reports study also found that investors who reported owning ETFs had significantly more investable assets than those affluent respondents who reported not using ETFs. The mean investable asset wealth of ETF owners was $737,000 compared to $512,000 for non-owners.
Cogent Reports also discovered that the average age and investable asset base of respondents was markedly different across a range of 11 ETF providers. On two opposing ends of the spectrum, the average age and investable asset base for respondents who were First Trust customers was 31.5 years and $576,000 respectively, compared to the averages of iShares customers which was 53.8 years and $1.1m.
As the ETF industry continues to grow, investors appear to be increasingly adopting these products for a range of investment solutions, including as core portfolio holdings as well as the basis for employer-sponsored retirement plans. The report found that 34% of respondents are using ETFs as part of employer-sponsored pension plans, up from 31% in 2014.
“Millennials and Generation X investors are entering their peak earning years, and more than three-quarters of them are actively contributing to a work-based retirement plan. Increased traction for ETFs in this space could be huge, both for the industry and for those individual providers that manage to get a meaningful piece of the action,” said Johnston-Ketterer.