Vanguard and Charles Schwab on Why Millennials Love ETFs

July 12, 2018 — 11:35 AM EDT

Millennials love exchange-traded funds (ETFs) more so than older investors, and for good reason. Not only does this form of passive investing have a low entry point, but ETFs are also accessible via digital investment platforms, the preferred method for many younger investors to create an investment portfolio.

"Millennials have grown up with ETFs in a way that other generations haven't," said Kari Droller, managing director of Charles Schwab's ETF platform, in a recent interview with Investopedia. This is not to mention that technology is fueling ETF adoption, with The Charles Schwab Corporation (SCHW) finding that 65% of millennials polled have used a digital platform to access ETFs. "A lot of tech-heavy users default to ETFs," Droller said.

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At last count, there were about 2,000 ETFs in the U.S. alone. Of those, Richard Powers of ETF product management at Vanguard said that the largest 400 ETFs in the market account for 90% of all ETF assets in the U.S. This implies that investors and financial advisors are gravitating toward the broad-based, low-cost ETFs that have a lot of assets invested in them.

"The primary ownership of ETFs on the retail platform ends up broadly diversified with a bias toward equities ETFs," said Powers in a recent interview with Investopedia, noting that the Vanguard Total Stock Market ETF (VTI) is among the most popular ETFs. On the bond side of things, Powers said that less than 20% of ETF assets are invested in that area, in part because fixed income in general is less popular among millennial investors.

ETF-Only Portfolios Rising in Popularity

Schwab's Droller pointed out that a lot of millennials are considering using only ETFs to build their investment portfolio, and that's true of both buy-and-hold investors and those who are actively trading. She believes millennials like the fact that, with ETFs, they can achieve broad exposure at a low cost and at the same time use niche ETFs to boost exposure outside of the core investments.

In its recent ETF Investor study, Schwab found that 42% of millennials said they are invested in ETFs, with 56% of investors in that generation saying they have replaced all individual stocks in their portfolios with ETFs. What's more, close to 80% of millennials see ETFs as the main investment vehicle in the future, with 74% of millennials saying that they expect to increase investments in ETFs during the next year and 54% signaling that they would be open to putting all of their investments in ETFs during the next year.

Commission-Free ETFs All the Rage

With so much interest in ETFs on the part of millennials and other investors, the leading brokerages have been responding. Both Vanguard and Schwab now offer commission-free ETFs. At last count, Schwab offers 265 ETFs commission free. Earlier in July, Vanguard announced that it would provide commission-free access to most of the ETFs on its platform, marking a shift from providing commission-free investing for only its own ETFs. Vanguard customers can now access close to 1,800 ETFs without commissions.

The way Powers sees it, as broader ETF adoption among a range of investors is on the horizon, the ETF market will likely follow the same path as index investments. Currently, there is a big population of investors who haven't used ETFs at all, but over time, the transfer of wealth will ensure that ETFs play a larger role in investing. "ETFs are going to become more ubiquitous in investors' portfolios," said Powers. "The more investors who can access commission-free ETFs is a good thing, and Vanguard is happy to be part of the charge."