This is not your mother’s stock market anymore.
In the next decade, $90 trillion will change hands as baby boomers transfer their wealth to their millennial children. And millennials have some pretty different ideas on how to invest their money.
Namely, millennials invest in exchange-traded funds more than any generation before them, according to State Street Global Advisors’ 2024 ETF Impact Survey. Here are three reasons millennials are so enthusiastic about the ETF market.
Millennials vs boomers
The generational gap between millennials (those born between 1981 and 1996) and boomers (born between 1946 and 1964) results in a variety of different investing viewpoints.
Overall, State Street, which manages $4.3 trillion in assets, found that boomers are doomers when it comes to the overall economic outlook. While 38% of US millennials are optimistic about the near-term global economy, only 8% of US boomers are ā and this downward trend was present across the world in Australia, Singapore, and Japan.
State Street Global Advisors
Millennials across the world are also more likely than any other generation to hold ETFs in their portfolios. In the US, 58% of millennials held ETFs, while only 37% of boomers did.
State Street Global Advisors
If boomers aren’t invested in ETFs, what are they invested in? Mutual funds, according to Scott Chronert, global head of ETF research at Citigroup.
Mutual funds, like ETFs, take money from many investors and invest it into baskets of securities. However, while you can purchase ETFs readily on an exchange and trade them like stocks, your mutual fund order can only be executed once a day after market close.
“A lot of the investments around that came back to a time before you had the electronic trading of individual securities, and a mutual fund wrapper was a natural way of attracting a retail investor into the stock market,” Chronert said.
Why millennials are piling into ETFs
On the contrary, Chronert sees that millennials and younger generations grew up with more exposure to ETFs through advertising, whether on billboards or social media. The first ETF was created in the early 1990s, and State Street is one of the largest ETF issuers in the world, with $1.36 billion in ETF assets under management as of March 31.
According to the ETF impact survey, investors choose the asset class for a variety of reasons, such as diversification, flexibility in trading, lower costs, and sector-specific exposure, among others.
State Street Global Advisors
These reasons all align closely with millennials’ investing appetite.
First, ETFs offer accessible diversification benefits, which is exactly what millennials are looking for. According to one Bank of America study, millennials and younger investors allocate their money more evenly across asset classes than boomers, who tend to disproportionately concentrate their holdings in equities.
“Among the opportunities that ETFs provide is a means of getting a more targeted exposure,” Michael Arone, chief investment strategist of State Street’s US SPDR business, said. Investors can use ETFs to gain exposure to any stock sector or index. The SPDR S&P 500 ETF Trust (SPY), Invesco QQQ Trust (QQQ), and Vanguard Russell 1000 Index (VRNIX) offer exposure to the S&P 500, Nasdaq, and Russell 1000, respectively.
Boomers who are more familiar with mutual funds are missing out on the diversification opportunities that ETFs provide across different asset classes. “It’s really hard to find an investment grade fixed income mutual fund,” according to Chronert.
That’s not the case with ETFs: The iShares Core US Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND) are both examples of investment grade bond ETFs.
ETFs also offer easy liquidity, especially when compared to the mutual funds that are popular with older demographics. Investors can’t trade mutual funds intraday because trades are executed once a day after the 4 p.m. market close. Mutual funds can also come with more fees than ETFs, such as sales loads, redemption fees, and other transaction fees, making the trading process more complicated. For millennials who grew up familiar with electronic trading, ETFs can be traded instantaneously with a few taps on a phone through apps such as Robinhood.
There are also low investment thresholds for ETFs: thanks to fractional trading, you can get started with just a few dollars, whereas mutual funds might require larger minimum initial investments. All of these factors increase the ease of ETF transactions for younger investors.
State Street also sees the alternative asset space as an important millennial driver of growth for ETFs. The creation of spot bitcoin ETFs in January and the impending launch of spot ether ETFs are indicators of strong demand. State Street recently partnered with the digital asset and blockchain manager Galaxy Asset Management to provide investors with more opportunities in the $2.4 trillion digital asset market.
Millennials, with their more optimistic view of the economy compared to boomers, are the most likely demographic to invest in a riskier asset such as cryptocurrency. According to an eToro retail investor survey, investors under the age of 35 are four times as likely to invest in cryptocurrency than those 55 and older. The convenience of an ETF makes it easy for millennials interested in alternative assets to include cryptocurrency, blockchain, and other holdings in their portfolios.
According to State Street, just 45% of individual US investors hold ETFs in their portfolios. There’s a significant runway for ETFs to expand going forward, especially as millennials gain more generational wealth and demand more flexible and accessible ways to invest.