The average portfolio of a millennial ETF investor is allocated 45% to fixed income and 55% to equity, the most conservative allocation of any of the age groups, according to a new survey by Schwab Asset Management.
By comparison, the boomer ETF investor, who traditionally would hold the most conservative allocation, is invested only 31% in fixed income and 69% in equities, said the report, called “ETFs and Beyond,” released today at the Schwab IMPACT 2023 conference in Philadelphia. Even Gen X investors are less conservative, with 37% in fixed income and 63% in equities.
“You see that higher pivot to fixed income in the younger generation. That’s what’s really interesting. It’s not those that are the baby boomers, who are closer to retirement, that you would think would be derisking their portfolio,” said David Botset, head of equity product management. “I think in part it’s the younger generation that has gone through a much more volatile period of time, many downturns in the market, that perhaps are feeling like they don’t want to take that risk.”
Depending on the millennial, they may have seen their parents go through the tech boom and bust, but certainly the Great Financial Crisis, he said, followed by the pandemic uncertainty and the rut of 2022.
“Meanwhile, the older generation that grew up on 7% returns in the stock market consistently continues to be more heavily weighted to equity,” he said.
Botset said that while other surveys have also shown younger investors to be more conservative, it was the embrace of the fixed-income ETF that surprised him.
“The thing about ETFs in particular is that ETFs predominantly have been equity based. The results of the survey are showing an embracing of fixed income,” he said. “We’ve actually seen that inflows this year, year-to-date, to U.S. fixed income has been one of the leading categories. … It’s neck and neck with U.S. equity.”
The survey of 2,200 investors was conducted this summer between June 13 and June 28. The sample was made of 1,000 ETF investors, 1,000 non-ETF investors and 200 investors who just began investing in 2020.
Many of the survey’s findings indicate that once an investor has experience with ETF investing, it’s hard to stop. Some 95% of ETF investors said they are considering more ETF investment in the next two years, citing diversification and the ease of buying and selling as the top to reasons.
Even non-ETF investors are starting to register more interest in the vehicle, with 34% this year saying they’re extremely interested in learning more compared to 27% last year. And 48% of non-ETF investors said it’s likely they will buy an ETF in the next two years compared to 41% last year.
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%). Cryptocurrencies, international equity and alternatives were the bottom three, the survey said.
Compared to older ETF investors, millennials are most likely to say that ETFs are their vehicle of choice, with 89% making that statement, according to the survey. Only 78% of Gen X said that, and only 67% of boomer ETF investors did.
For many advisors presented with younger clients so conservative as to have a 55%/45% equities/fixed income split, what would follow would be a conversation about using the youthful decades for the riskiest exposures, confident that any down markets can be made up for with time.
But Botset said there is a second perspective that counters that conventional wisdom.
“Let’s also remember the stage of when people started to invest. Take my parents. When they started working, they didn’t have access necessarily to a 401(k). That has come around more recently. The younger generation, as they start working, has much earlier access to that,” he said. “The ability to build wealth earlier is much easier for this generation than for the older generation that didn’t have that opportunity. With the compounding effect, you can earn a lot over the longer period of time.”
Instead, millennials seem to have more of a process to their investing, where they start off conservative when they feel they have a small nest egg to protect. As the next egg grows, they’re able to take on more risk, Botset said. And then, finally, they become more conservative as they get closer to retirement.
And it’s in retirement that ETF assets can really shine, he said.
“One of the survey questions asks about why someone uses ETFs. It’s retirement needs, it’s income needs,” he said. “There’s two things I can control in investing. One is how can I reduce my costs? ETFs have been a great way to do that. And number two is how do I increase my tax efficiency? Also possible with ETFs.”
And as non-ETF investors get closer to retirement, they, too, are considering first investments over the next two years, the survey found.
“Going forward, the growth in ETFs is likely not just fueled by ETF investors. It’s about non-ETF investors investing the more they become comfortable with the ETF wrapper,” he said. “Increasingly, we are seeing that component of investors saying in the next couple of years they expect to invest in ETFs as they get close to retirement and think about transitioning their portfolios.”
