New Vanguard research examines demographic and behavioral trends of ETF usage …
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.