ETF investors continue to show strong interest in personalization; Familiarity with direct indexing grows

Fixed income has been in focus this year and surprisingly, Millennial ETF investors are gravitating toward this asset class more than their older peers, according to the 2023 edition of “ETFs and Beyond,” an annual study by Schwab Asset Management™. Millennials are not only more interested in learning about fixed income, but more of them plan to invest in fixed income ETFs in the next year, and the asset class makes up a larger portion of their portfolios compared to older generations.

ETF Investors Stay the Course

Despite a dramatically different investing environment from 2022, cool heads have prevailed among ETF investors this year. Rather than retreat in the face of uncertainties, most are staying the course or finding opportunities to increase investments in ETFs.

“ETF investors have navigated two dramatically different market environments over the last two years, yet their approach to investing and affinity for ETFs has remained extremely consistent,” said David Botset, Managing Director, Head of Equity Product Management and Innovation, Schwab Asset Management. “As we’ve seen historically, Millennials take a unique approach to how they invest, and that holds true for their approach to fixed income – an asset class that has garnered a lot of attention.”

Following the Money

Schwab Asset Management’s long-running study of ETF investors finds that cost remains the top factor when choosing an ETF and overall affinity for ETFs remains high. Eighty percent of ETF investors agree that ETFs are their investment of choice. The overwhelming majority (95%) say they are likely to consider purchasing an ETF in the next two years and about half (52%) say they have increased their allocations to ETFs in 2023. That said, ETFs as a share of portfolios has come down slightly from 33% last year to 29%.

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%). Most ETF investors (63%) believe the 60/40 portfolio is the right mix to meet their goals and their portfolios largely reflect that point of view, with 61% of their portfolios in equities and 39% in fixed income, on average.

New to the Party

In the years ahead, a significant driver of growth for ETFs may come from investors who haven’t yet bought their first ETF. Almost half of non-ETF investors (48%) say they are likely to purchase an ETF in the next two years, significantly higher than last year (41%). More than a third (34%) are extremely interested in learning more about ETFs – up from 27% in 2022. Among non-ETF investors who are likely to purchase an ETF in the next two years, 62% say the reason is to diversify their portfolios while 47% say it’s because ETFs are easy to buy and sell.

“We are at a moment where ETF investing has matured, and many investors are very comfortable using these products to execute their long-term plans. At the same time, there is a contingent of investors who haven’t tried ETFs yet and their interest is on the rise, so there is still significant runway for future education and adoption,” said Botset.

Millennials and ETFs – Next Level Adulting

Millennials’ love of ETFs continues to outpace other generations across several measures. They continue to be more heavily invested in ETFs, with 37% of their portfolios in ETFs. Eighty-nine percent say ETFs are their investment vehicle of choice and about a quarter of Millennials (22%) plan to significantly increase their investments in ETFs in the next year. Millennial ETF investors are broadly comfortable with ETFs, with 99% reporting they are extremely confident in their ability to choose an ETF that can help achieve their investment objectives.

The Pull of Personalization

Schwab Asset Management continues to see strong interest in more personalized investment offerings among ETF investors, with almost nine in 10 (88%) saying they are somewhat or very likely to personalize their portfolios more in 2023. Seventy-eight percent plan to make investments that align with their personal values. Millennials stand out as being most likely to personalize their portfolios in the year ahead and believe it is important to align their investments with their values and beliefs. Most ETF investors say it is extremely important to have more control over their investments (65%), greater ability to customize investments (61%), and that their investments are managed to optimize tax liabilities (61%).

Interest in direct indexing – an approach to personalized investing that is quickly gaining traction – remains strong, particularly among younger generations. Eighty-seven percent of ETF investors are familiar with direct indexing, up from 80% last year. Most ETF investors (69%) who are not already invested in a direct indexing solution say they are likely to invest in one in the next year. That figure rises to 80% for Millennials who are also much more likely to be extremely interested in learning about direct indexing (53%) than Gen X (34%) and Boomers (22%).

“The demand for personalized investing continues with Millennials leading the way. Investors’ desire to have more control and alignment of investments with their personal views is a major long-term shift that is still in the early innings,” said Botset. “Demand for personalization will be met by different types of products and solutions to meet different investor preferences – there won’t be one silver bullet solution. The takeaway: expect to see new innovations to help investors get where they want to go in the way they want to get there.”

To read the full report, click Research | About Schwab.

About the Study

Schwab Asset Management commissioned Logica Research to conduct an online survey of 2,200 individual investors between the ages of 25 and 75 with at least $25,000 in investable assets, 1,000 of whom have bought or sold ETFs in the past two years and 1,000 of whom have not bought or sold ETFs within the past two years. The study was conducted from June 13 – June 28, 2023. Survey respondents were not asked to indicate whether they had accounts with Schwab. All data is self-reported by study participants and is not verified or validated. Logica Research is neither affiliated with, nor employed by, Charles Schwab & Co., Inc.

About Schwab Asset Management

One of the industry’s largest and most experienced asset managers, Schwab Asset Management offers a focused lineup of competitively priced ETFs, mutual funds and separately managed account strategies designed to serve the central needs of most investors. By operating through clients’ eyes, and putting them at the center of our decisions, we aim to deliver exceptional experiences to investors and the financial professionals who serve them. As of September 30, 2023, Schwab Asset Management managed approximately $928.7 billion on a discretionary basis and $30.9 billion on a non-discretionary basis. More information is available at www.schwabassetmanagement.com.

About Charles Schwab

At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

More information is available at www.aboutschwab.com. Follow us on Twitter, Facebook, YouTube and LinkedIn.

Disclosures:

Investing involves risk including loss of principal. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

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 of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Schwab Asset Management™ is the dba name for Charles Schwab Investment Management, Inc. Schwab Asset Management and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

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(1023-3DNO)

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