Insights from Marie Chandoha
President and CEO
Millennials are unlike their parents’ generation in so many ways: they marry later, have fewer children, rent rather than buy homes, spend vast amounts of time with technology, and spend less money on luxury items, among many differences. But when it comes to investing, Millennials—those between 25 and 35 years old—act a lot like their 60-year-old forebears by being just as conservative.
Who could blame them? Many Millennials saw the dot-com bubble burst in 2000 and the stock market gutted in 2008. They watched major banks fail, and drove past foreclosed houses. Meanwhile, their student loans piled up to precipitous heights. No wonder they play it safe. Of the roughly 80 million Millennials, about 40% say their preferred investment is cash.1 And, half of Millennials said they didn’t know what their best investment options are, according to a survey conducted by Charles Schwab & Co., Inc. and released in late 2015 (the Schwab survey).2
Because Millennials are the biggest demographic ever in U.S. history, what they like in terms of investing will have big implications for our industry going forward, as well as for the advisers and investment professionals serving this generation of the future.
It seems clear that millennials prefer lower-cost, simple-to-use, easy-to-understand financial products. They like using technology and tend to favor automated investment services, often referred to as "robo-advisors." They also like selection and desire a wide range of investment options. To this generation, the financial markets should be like a well-stocked supermarket, with a variety of prepared meals and prepackaged products that require little time and attention when they bring it home.
The investment strategies and products that have those characteristics are going to have the most appeal to this rising generation—and one such product is the exchange traded fund, or ETF.
Since they burst onto the scene in the early 1990s, U.S.-listed ETFs/ETPs (exchange traded products) have garnered over $2 trillion in assets as of the end of 2015.3 Looking across generations, ETFs are an increasingly important part of investors’ portfolios. By 2020, the Schwab survey respondents said that one-fourth of their portfolios will be allocated to ETFs. But a closer look shows that there are some particularly pronounced differences in ETF usage by Millennials.
According to the Schwab survey, 41% of Millennials’ portfolios are in ETFs—almost twice the allocation as that of all investors.
According to the Schwab survey, 41% of Millennials' portfolios are in ETFs—almost twice the allocation as that of all investors. Similarly, 61% of Millennials said they plan to increase their ETF investments this year, compared to 31% of all ETF investors. And perhaps most significant in my eyes is that 70% of Millennials see ETFs as the core investment type in their portfolio in the future.
That’s a lot of faith in ETFs.
While mutual funds served to ‘democratize’ investing for the investing public, ETFs took that a step further by providing access to more markets, generally at a lower price. They also offer more transparency, in that they trade intraday like stocks and enable investors to look at their holdings regularly. There’s more. ETFs, particularly equity ETFs, can have important tax benefits over mutual funds. And, according to the Schwab survey, a greater percentage of Millennials cited understanding the tax implications of ETFs as the No. 1 topic they’d like to understand better. How to choose an ETF and the differences between cap-weighted ETFs and Smart Beta ETFs followed closely behind.
ETFs can also be easily packaged in solutions-based products for Millennials who don’t want to invest the time to learn about the markets. Whether it’s a managed account strategy, a "robo-advisor" solution or another packaged product, the index-based strategies that make up the ETF market serve as low cost ingredients for pre-packaged products. Add up all these features, and ETFs offer the things that appeal the most to Millennials—ease of use, lower-costs and variety.
We can't blame Millennials for thinking conservatively when it comes to their investments. And by understanding and evaluating their investment objectives, risk profile and preferences, we have clues about how we can help move beyond the fears that may keep them from realizing the benefits of greater engagement in the markets.
Because Millennials see the potential benefits of ETFs, these investment products can serve as a great springboard to help this generation invest and stay invested so they can achieve everything their parents did—maybe even much more.
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Marie Chandoha is President and Chief Executive Officer of Charles Schwab Investment Management Inc. (CSIM), a subsidiary of The Charles Schwab Corporation. Chandoha is an Executive Vice President of Schwab and serves on the corporation’s Executive Council. With more than $265 billion under management, CSIM is one of the nation’s largest asset management companies, the third largest provider of index funds and a top 10 provider of ETFs and money market funds.* Since assuming leadership of CSIM in 2010, Chandoha has achieved record growth by developing a cultural commitment to providing investors with quality funds at a great value, managing them with integrity and examining risk from multiple angles. A passionate advocate for the interests of investors and the advancement of women in financial professions, Chandoha is considered one of the most accomplished and respected female executives in the industry. She was recently named one of the top women in asset management by Money Management Executive and one of the most powerful women in finance by American Banker.
*As of December 31, 2015.
1. Source: Bankrate.com
2. In its fifth installment, The 2015 ETF Investor Study by Schwab is an online survey of more than 1,000 individual investors between the ages of 25–75 with at least $25,000 in investable assets who have purchased ETFs in the past two years.
3. Source: Strategic Insight
Past performance is no guarantee of future results.
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.
Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
The opinions expressed are not intended to serve as investment advice, a recommendation, offer, or solicitation to buy or sell any securities, or recommendation regarding specific investment strategies. Information and data provided have been obtained from sources deemed reliable, but are not guaranteed. Charles Schwab Investment Management makes no representation about the accuracy of the information contained herein, or its appropriateness for any given situation.
The views expressed are those of Marie Chandoha and are subject to change without notice based on economic, market, and other conditions.
While most ETFs publish their portfolio holdings on a daily basis, there may be ETFs that publish their holdings less frequently.
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