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Millennials And Sophisticated Investors Driving ETF Adoption
Traders Magazine Online News, May 8, 2019
Who's buying all these ETFs these days?
Against the backdrop of a stock market that keep rising and interest rates that appear to be stable, albeit for the moment, fixed income exchange-traded funds (ETFs) were the best performing in March.
Investors poured $34.5 billion into fixed income ETFs during Q1, according to the most recent US-Listed Flash Flows Report from State Street Global Advisors. Bond funds are now breaking records and making headlines, began Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors. Fixed income ETFs have taken in $34.5 billion to start the year, the highest flow total ever for a first quarter, narrowly beating out the hot start to 2016. In March they took in $10.4 billion in new cash.
But there's more.
While the fixed-income market was all the rage, according to Bartolini, equity ETFs didn’t exactly underperform. Global equities posted their 11th best quarter over the last 30 years, and their best first quarter since 1998. Equity funds received the most flows in the month of March, pulling in $19 billion and pushing their year-to-date total finally positive. Combined with the $15 billion from February, equity funds have now taken in more than $30 billion in the last two months. Bartolini said this was not surprising given how global equities have rallied off of December 2018 lows and central banks have reaffirmed a more accommodative stance.
With $18 billion of inflows in the month of March, US-focused equity ETFs now have taken in the most inflows for two consecutive months out of any other geographical focus. This has pushed their year-to-date total positive after a tough January, Bartolini said, and the recent influx of cash to the US can be partly attributed to the technical environment becoming more favorable.
Against this backdrop mega money manager Vanguard conducted new research that identified distinctive behavioral trends amongst ETF investors, concluding that age and investment experience are the foremost drivers of ETF usage. Early ETF adoption among self-directed investors, published by Vanguard Center for Investor Research, examined the behavior of more than five million retail investor households and revealed that older, more established investors with relatively complex portfolios tend to use ETFs to supplement other investments. At the other end of the spectrum, ETFs serve as the primary investment vehicle for millennials and new investors.
Vanguard researchers also found that portfolio complexity, tenure, and wealth are contributing factors motivating ETF investment behavior. In particular, the paper identifies a correlation between number of investments and ETF usage—individuals with more holdings have a significantly higher likelihood of owning ETFs.
“Given ETFs’ dominance of the current investing conversation, we wanted to examine the influences driving their adoption and application,” said Jean Young, senior research associate and co-author of the paper. “There are two prevailing dynamics amongst ETF investors: they either employ complex portfolio strategies—indicating investing comfort and acumen—or they are younger and less experienced—suggestive of a willingness to try new investment approaches and a view of ETFs as a diversified investment vehicle.”
While ETF growth over the last decade has been largely driven by financial advisors, the paper also suggests that individual investors are increasingly adopting ETFs. The number of Vanguard households using ETFs more than doubled over the last five years—11% purchased ETFs in 2018, compared to 5% in 2013. Mutual funds, however, remain the dominant holding—83% of Vanguard households held mutual funds at the end of 2018, down from 89% in 2013.
The rising popularity of ETFs at Vanguard is at least partially driven by investors who opened their first account within the previous three years, Young added. In 2018, 17% of new households purchased ETFs, compared to 6% in 2013. Over the same period, new Vanguard households moved away from mutual funds—62% of new accounts purchased mutual funds in 2018, down from 84% in 2013.
The proportion of Vanguard households considered ETF enthusiasts—those with more than 75% of their portfolios invested in ETFs—increased from 8% in 2013 to 20% in 2018. Amongst new households in 2018, 42% were ETF enthusiasts, up from 26% in 2013. ETF enthusiasts are younger investors—their median age is 36—and are relatively new to Vanguard—their median account tenure is three years. Compared to other investors, ETF enthusiasts have smaller account balances, fewer holdings, and a higher equity allocation.
Relatedly, in a bid to bring more investors, incluing budget-conscious Millenials and others to the ETF space, Vanguard has announced that it has cut prices on 21 of its ultra-low-cost funds, including eight of its ten largest ETFs.
The ETFs getting price cuts include some of the largest ETFs on the market today, including the $114 billion Vanguard Total Stock Market ETF (VTI) and the $112 billion Vanguard S&P 500 ETF (VOO), the third and fourth largest funds, respectively. VTI and VOO now each cost 0.03%, down from 0.04% apiece.
Other notable price drops include the $72 billion Vanguard FTSE Developed Markets ETF (VEA), whose expense ratio went from 0.07% to 0.05%; and the $66 billion Vanguard FTSE Emerging Markets ETF (VWO), whose expenses dropped from 0.14% to 0.12%.
The move is designed to make the issuer more competitive with others such as Schwab, State Street and J.P. Morgan.
The $48 billion Vanguard Value ETF (VTV), $40 billion Vanguard Growth ETF (VUG), and $38 billion Vanguard Total Bond Market ETF (BND) also saw price drops, from 0.05% to 0.04%.
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