Millennials and sophisticated investors driving ETF adoption

New Vanguard research examines demographic and behavioral trends of ETF usage

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May 02, 2019, 10:37 ET

VALLEY FORGE, Pa., May 2, 2019 /PRNewswire/ -- New Vanguard research identified distinctive behavioral trends amongst exchange-traded fund (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. 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.

Vanguard: An ETF Leader
As an indexing pioneer, Vanguard has emerged as one of the industry's principal ETF issuers, recently surpassing $1 trillion in global ETF assets under management¹. Vanguard's carefully curated line-up of 80 U.S. ETFs provides high-quality, low-cost, diversified options for advisors and investors alike. Some of the most widely held ETFs in the industry are from Vanguard, including Vanguard Total Stock Market ETF (VTI), Vanguard S&P 500 ETF (VOO), Vanguard FTSE Developed Markets ETF (VEA) and Vanguard FTSE Emerging Markets ETF (VWO).

"Investors gravitate to Vanguard for our investment management and product offerings, and ETFs are a critical application of our capabilities," said Vanguard Chief Investment Officer Greg Davis. "In addition to building one of the most tenured and experienced investment teams in the industry, we strategically leverage our scale, state-of-the art technology, and trading sophistication, resulting in an unparalleled track record."

Vanguard has a long history of product innovation and has continued to expand its global product line-up, driving the adoption of broadly diversified ETFs in both the U.S. and international markets. In the U.S., Vanguard has underscored its ETF leadership with the introduction of a suite of actively managed factor ETFs, enabling advisors and institutional investors to harness well-known factor exposure in a more transparent and cost-effective way. Vanguard has further bolstered its product line-up with the recent introductions of Vanguard Total World Bond ETF (BNDW) and a pair of ESG ETFs. Vanguard has also driven down the cost of ETF ownership with the expansion of its commission-free² platform last summer.

To help investors both better understand and build thoughtful, broadly diversified portfolios with ETFs, Vanguard is actively investing in resources and tools to complement its product line-up. For individual investors, Vanguard offers an interactive tool to compare ETFs, including pre- and post-tax returns, expense ratios, and other data, and regularly publishes educational materials, including a five-point checklist of factors to consider beyond cost when evaluating ETFs. For advisors, who have increasingly leveraged turnkey ETF portfolios as a means of streamlining portfolio construction and automating rebalancing, Vanguard offers six distinct model portfolios series, leveraging Vanguard's extensive portfolio construction expertise and thought leadership. Vanguard is currently the largest issuer-offered ETF strategist, with more than $15 billion in model portfolio assets³.

About Vanguard

Vanguard is one of the world's largest investment management companies. As of March 31, 2019, Vanguard managed $5.4 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 415 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.

^{^[1]} Source: Vanguard, as of March 31, 2019.

^[2]Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. Commission-free trading of non-Vanguard ETFs excludes leveraged and inverse ETFs and applies only to trades placed online; most clients will pay a commission to buy or sell non-Vanguard ETFs by phone. Commission-free trading of non-Vanguard ETFs also excludes 401(k) participants using the Self-Directed Brokerage Option; see your plan's current commission schedule. Vanguard Brokerage reserves the right to change the non-Vanguard ETFs included in these offers at any time. All ETFs are subject to management fees and expenses; refer to each ETF's prospectus for more information. Account service fees may also apply. All ETF sales are subject to a securities transaction fee. See the Vanguard Brokerage Services commission and fee schedules for full details.

^{^[3]}Source: Vanguard and Morningstar, Inc., as of December 31, 2018.

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