The report, entitled Early ETF adoption among self-directed investors, compared investment strategies from long-term investors and new investors who had opened an account with the firm between 2015 and 2018. The proportion of Vanguard’s total US household investors using ETFs is growing, having doubled to 11% from 2013 to 2018.
ETF Stream’s recent insight found millennials do invest using online platforms and robo advisors but it is the 40-50 year olds which remain the largest demographic for the platforms.
Despite the interest in ETFs, it is mutual funds that remain the favourite with 83% of the company’s US retail investors using the investment products, significantly ahead of ETFs.
A driver for the increased popularity in ETFs comes from Vanguards new investors. In 2018, 17% of new investors purchased ETFs, up from 6% in 2013.
Vanguard defined three types of investors based on the proportion of their portfolios which were comprised of ETFs:
-Diversifiers – Hold 1% to 25% of assets in ETFs
-Users – Hold 26% to 75% of assets in ETFs
-Enthusiasts – Hold more than 75% of assets in ETFs.
Among the new investors, 42% of ETF buyers were included in the enthusiast category. Given the growth of ETFs in the last decade, it is more likely new investors will buy ETFs as they are making active decisions, says Vanguard. Older clients would have invested in mutual funds from an early stage and will be less likely to adapt their investment strategies. As the saying goes, “if it ain’t broke, don’t fix it”.
But that isn’t to say only millennials are buying ETFs. The median age of the diversifiers is 58 years old with the median ETF allocation of 7%. At the other end of the table, the median age and ETF allocation for enthusiasts is 36 years old and 97%, respectively.
While these figures suggest diversifiers don’t put much capital in to ETFs, the median number of investments held by the group is three-times larger than that of enthusiasts. Additionally, the median account balance for diversifiers is $344,000, significantly higher than enthusiasts with only $14,000. Some simple maths calculates the average investment by diversifiers in ETFs is $24,080 whereas enthusiasts’ average is $13,580.