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Retail participation in exchange-traded products has increased but there are generational differences in how investors carry out research, find advice and how they trade.
A Nasdaq report, ETPs are empowering the next generation of investors: The shifting profile of retail investors, found that issuers, financial advisors and investment firms must innovate and adapt to effectively target different generations of investors. Nasdaq, in partnership with Morning Consult, conducted an online poll of 2,000 retail investors between October 12 and October 22 2021.
Giang Bui, SME and Head of US ETP Product at Nasdaq, told Markets Media: “The key takeaway from the survey is that one size does not fit all.”
Gen Z, born between 1997 and 2012, is hitting their mid-20s and entering the workforce. They use diversified information sources including financial advisors, traditional news, podcasts and social media with online discussion boards as their most popular platform for advice. In contrast at the opposite end of the spectrum, Baby Boomers, born between 1946 and 1964, need to manage their retirement without outliving their savings. Baby Boomers have the strongest dependence on financial advisors and are unlikely to use social media and digital platforms for their investment decisions.
In between there are two generations – Gen X, born between 1965-1980, who will start thinking about retiring in the next decade while Gen Y, born between 1981-1996, is about to turn 40.
Giang said: “Although there are changes across generations, one mainstay is that the financial advisor is still very important among all age groups.”
Financial advisors were trusted more than any other resource according to the survey. Even the majority, 68%, of investors who use social media said financial experts generate the most useful content.
Giang highlighted that financial advisors are also the highest users of ETPs in the US. She said: “Financial advisors both recommend and incorporate ETPs into their clients’ portfolios. We encourage our listing clients to understand the importance of the channel in their sales and marketing strategies.”
The majority of retail investors in the sample, 57%, currently invest in ETPs or did so in the past, while 29% have never invested in ETPs but would consider them in the future. Younger generations are more familiar with ETPs, although older investors have allocated more funds due to higher income and their accumulation of wealth.
“It is an opportunity for issuers to target an under-served market and raise awareness amongst the older generations of the benefits of ETFs and how they could fit their investment objectives,” Giang added.
Nasdaq supports ETP issuers with marketing and distribution to reach their specific target audience as the sector is very competitive.
“For younger investors we consider online discussion platforms to be a better fit while a print publication may be more appropriate for the older generation,” she added. “We have also partnered with websites or podcasts to target advisors.”
Younger generations spend more time on research before they invest but the report found that they can benefit from additional education to help them make informed decisions. Gen Z and Gen Y investors are also more likely to look at their investment portfolios several times a day and trade more often than older generations.
Giang said Nasdaq aims to support issuers in reaching this audience by working with financial advisors and retail brokers to develop more educational content.
“Education is very important to fill the knowledge gap, for example, around due diligence and best trading practices,” she added. “There are many channels and formats to create educational content, and support clients with everything from videos to whitepapers and articles to animations.”
Cryptocurrency products are gaining popularity with nearly half of respondents in the survey investing in the asset class.
The US Securities and Exchange Commission has not approved a spot bitcoin ETF so the only crypto ETFs on regulated US exchanges are funds that track bitcoin futures or that track equities exposed to the crypto ecosystem. Giang added that a Bitcoin futures ETF was one of the fastest to hit $1bn in assets and Nasdaq expects many flavors and varieties of crypto ETPs into the future.
”There have also been a large number of ESG product launches related to sustainability and climate change, which have attracted all generations of investors,” Giang said. “The Nasdaq brand is very much aligned with ESG, and we are excited with the continued appetite for these products in the market.”
The ETF market had record inflows and record new launches in the last two years and Giang expects growth to continue. In the first two months of 2022 US ETFs had the second highest net inflows on record of $99bn according to ETFGI, an independent research and consultancy firm.
“We are on track to have a similar number of listings as last year, or maybe even more,” Giang added. “It has been a strong start to the year and it really indicates how versatile ETFs are as an investment vehicle and that they can be used in different market conditions.”
In the current markets investors are also using ETFs to provide protection against rising inflation, generate income or access a broad-based exposure with downside protection.
“The SEC adopted new regulations to modernize the ETF framework in 2019 and it really opened the door for more innovation and for products to come to market more quickly,” added Giang. “So the ETF market is going to continue to be interesting for investors.”
Read the full report: https://www.nasdaq.com/docs/etps-empowering-next-generation-of-investors