JHC’s Gudgeon: The demographic that is piling into ETFs


At the end of July global assets in exchange traded funds (ETFs) reached a new high of $3.17 trillion, according to consultants ETFGI, including $511 billion in European listed funds.

The index-trackers have seen astonishing growth in the last decade. Assets in ETFs increased more than five-fold over that period. Last year, they surpassed assets in hedge funds. According to Meb Faber, co-founder of Cambria Investment Management, within four years they could hold more money than mutual funds.

That growth is driven by millennials, the 18-35 year olds who have grown up with ETFs. Charles Schwab’s ETF investor study shows that investors overall allocate 22.5 per cent of their portfolios to ETFs, but among millennials the average allocation is 35.8 per cent. And six out of ten say ETFs will be their primary investment vehicle in future.

Given $100,000 to invest, more than half of millennials (53 per cent) would put $50,000 or more into ETFs. That is, if they are given the chance…

Low costs, wide ranging

The most obvious attraction of ETFs is the low costs. This is important for all investors. For millennials, who have spent a significant portion of their adult lives in a low interest rate, low return environment, it’s particularly critical.

This has not dented millennials’ ambitions, however. While ETFs have benefited from a broad move away from active managers, research shows millennials’ seeking returns well above that of the broad stock market. ETFs provide both the low costs and range of exposures to try to meet these investment ambitions.

It’s precisely for this reason that the robo advisers being embraced by younger investors are using ETFs. With them they can create actively managed asset allocation using low-cost, passive funds. But as the robo advisors show, it’s not all about costs. The attraction of ETFs is also the immediacy and transparency they bring and which millennials demand.

A technology challenge

The great achievement of ETFs is to have brought the simplicity and cost-effectiveness of index investing into the digital age.

Mutual funds, valued and traded once a day, were powerful vehicles for a paper-based world, in which investors relied on periodic statements and discussions with their adviser. But they are poorly adapted to meet the demands of an always-on generation, monitoring and adjusting investments by smartphone.

ETFs, trading as stocks on exchange with real-time valuations are the perfect fit for these modern investors. But these characteristics also pose significant challenges for traditional fund platforms engineered for mutual funds and the once-a-day world. Many struggle to support ETF trading properly, if at all. This is not sustainable.

Meeting millennials demands to use ETFs requires genuine straight through processing, with the entire trade conducted seamless and electronically. Without it, the benefits of the ETFs are eroded or lost; significant manual interventions to allow intraday trading can only add to costs or undermine the customer experience. Most probably it will do both.

But STP is key to not just efficiently servicing accounts and products with significant ETF allocations; it’s also a prerequisite to developing the digital experiences that will engage and add value for these investors.  Online trading and a website are just a first step. Millennials are seeking fully functional, intuitive and integrated mobile experiences to manage their investments in future.

Those that want to play a part in that future need to ensure their platforms are ETF-ready.

Jerome Gudgeon is head of managed services at JHC.