As interest rates have increased, so has the appeal of fixed income in investment portfolios, according to an annual ETF investor study conducted by Schwab Asset Management. The study also found that younger investors are adopting fixed income instruments, including exchange traded funds, at a higher rate than older generations.
“Millennials actually indicated that they have a larger percentage of their portfolio in fixed income than older generations, which was quite surprising and not what you would expect,” said David Botset, head of equity product management and innovation at Schwab Asset Management, at the Schwab IMPACT conference in Philadelphia.
Not only are millennials investing more in fixed income products, but those who aren’t are more interested in learning about the asset class and said they are more likely to invest in fixed income ETFs in 2024.
Schwab’s data is based on an online survey of 2,200 individual investors between the ages of 25 and 75 with at least $25,000 in investable assets, half of whom bought or sold ETFs in the past two years and half who haven’t. It found that millennials have as much as 45% of their portfolios invested in bonds, mortgage-backed securities and other fixed income assets, compared with 31% of baby boomers. Generation X investors commit around 37%.
Exactly half of millennial respondents said they want to learn more about ETFs, compared with 36% of boomers and 42% of Gen Xers. A little more than half of millennials (51%) plan to invest in a fixed income ETF in 2024, as do 45% of Gen X investors and four in 10 boomers.
Fixed income ETFs have gone through “many different gyrations in the market,” according to Botset. “Being able to demonstrate that the ETF wrapper works, they’ve proven that they will trade over time, and they will trade efficiently and effectively,” he said.
While the asset class has become more attractive in the current market environment, Botset said investor behavior had remained remarkably consistent in the face of turbulent market conditions.
“It’s not changing their allocations in any significant way,” he said. “Which I think is interesting, but it’s also reassuring that many investors aren’t trying to trade and time the market. They’re really thinking about sticking to a diversified portfolio.”
The study also found 80% said ETFs are their vehicle of choice and more than nine in 10 said they are likely to invest in at least one in the next two years, while more than half have increased allocations this year. Even so, ETFs as a share of portfolios has declined slightly—from 33% last year to 29% in 2023.
Among ETF investors, 55% are looking at equities, 47% are planning to buy fixed income products and 43% are considering real assets. Overall, of existing holdings, an average of 51% are in equity ETFs vs. 39% in fixed income ones.
The reasons investors find ETFs attractive are liquidity and diversification. ETF costs and tax implications are also present, while considerably less pressing, concerns.
A vast majority of investors are also looking for personalization, according to Schwab.
Almost nine in 10 of all ETF investors said they’re thinking about personalizing their portfolios, while 78% plan to invest in companies that align with their values. Most (65%) say it is “extremely” important to have more control over their investments, while six in 10 say they value customization and tax management.
“Millennials, in particular, want to invest more with their values and their beliefs than what we see with the older generation,” said Botset. “But personalization also comes in other areas like thematic investing, where it's not necessarily about your values and your beliefs, but if you have an interest in an area of the market or a point of view. For instance, we hear all the time now that investors have an affinity for AI and want exposure to that part of the market.”
More ETF investors are familiar with the concept of direct indexing, up seven percentage points from last year at 87% in 2023, and the strategy appears to be gaining popularity—eight in 10 millennials say they’re likely to put money into direct indexing funds, while almost half of boomers said the same at 48%.
“Investors’ desire to have more control and alignment of investments with their personal views is a major long-term shift that is still in the early innings,” according to Botset. “Demand for personalization will be met by different types of products and solutions to meet different investor preferences—there won’t be one silver bullet solution.”