SCHW Charles Schwab Corporation

While their affinity for ETFs remains strong, ETF investors also desire more personalized portfolios

ETF investors have faced a turbulent environment marked by high inflation, rising interest rates and market volatility, yet they have continued investing in ETFs and foresee the product making up a larger share of their portfolios in the future. At the same time, they are also interested in exploring investing options that will allow them to better personalize their portfolios, according to “ETFs and Beyond,” a new study by Schwab Asset Management.

Schwab, which has studied the attitudes and activity of ETF investors for more than a decade, found that ETF investors continue to view ETFs as a key part of their portfolios, with 80% saying ETFs are their vehicle of choice, up from 71% in 2020. ETFs now make up 33% of ETF investor portfolios, up from 27% five years ago, which tracks to the rate of growth those surveyed by Schwab predicted in 2017. Looking ahead, ETF investors expect 40% of their portfolios to be in ETFs in the next five years. And an overwhelming majority (93%) expect to purchase ETFs in the next two years, while 41% of non-ETF investors are also likely to do so.

“ETF investors have continued adding ETFs to their portfolios at a strong clip over the last ten-plus years. This speaks to the strengths of these products and their ability to deliver exposures, cost effectiveness, tradability, and tax efficiency investors seek through multiple market cycles,” said David Botset, Managing Director, Head of Equity Product Management and Innovation, Schwab Asset Management. “Sustained interest among current ETF investors combined with interest from those who have never invested in ETFs is a very promising sign for more growth ahead.”

Top Reason to Buy ETFs

ETF Investors

 

Factors ETF Investors Consider Extremely Important When Choosing an ETF

ETFs are easy to buy and sell

71%

Total cost

58%

Low expense ratio

52%

To diversify portfolio

67%

Reputation of the ETF provider

52%

The portfolio manager's experience/track record

50%

ETFs are low cost

50%

Historical returns of the ETF

50%

ETFs are tax efficient

46%

 

How well it tracks to its index

50%

ETF Investors in Action

ETF investors largely stayed the course with their ETF investments during the first half of 2022 despite a very challenging market environment. About half of ETF investor respondents said that market disruptions — including market volatility, rising interest rates and high inflation — did not impact how they invested in ETFs. Nearly one-third put more money into ETFs in response to these disruptions and around one-fifth took money out of ETFs.

ETF Investor Response to 2022 Market Disruptions

No impact to ETF investments

Increased ETF investments

Decreased ETF investments

Russia’s invasion of Ukraine

63%

24%

13%

Rising interest rates

50%

32%

18%

High inflation

47%

31%

22%

Market volatility

46%

34%

20%

In the year ahead, ETF investors plan to invest in U.S. equities (56%), real assets (47%), fixed income (47%), and cryptocurrencies (46%) via ETFs. When it comes to specialty ETFs, they plan to invest in dividend ETFs (53%), long/short ETFs (34%) and leveraged ETFs (33%). Newer categories are gaining steam too with about one-third (32%) planning to purchase actively managed ETFs, 27% planning to purchase ESG ETFs and 26% planning to add thematic ETFs to their portfolios.

The Next Frontier: Personalization

ETF investors are demonstrating an appetite for personalizing their portfolios. If requesting modifications to one’s investments was similar to asking for dressing on the side when ordering at a restaurant, 43% of ETF investors would be very likely and 48% would be somewhat likely to request modifications. Many ETF investors say it is extremely important to them to have more control and a greater ability to customize their investments, to optimize tax liabilities in their portfolios, and to align their investments with their personal beliefs and values.

ETF Investors Feel it is Extremely Important to…

Have more control over their investments

67%

Have greater ability to customize their investments

64%

Know their investments are managed to optimize tax liabilities

62%

Align their investments with their personal beliefs and/or values

50%

One of the fastest-growing areas of personalized investing is direct indexing and 46% of ETF investors are interested in learning more. One-third of ETF investors say they are very likely to invest in direct indexing in the next five years. ETF investors are also interested in being able to invest in long-term trends or macro themes (54%) and nearly half (46%) are interested in ESG-only portfolios.

When it comes to how they will personalize their portfolios in 2023, 37% of ETF investors are very likely to invest more in companies or funds that align with their personal values, while 29% will divest from companies that do not align with their values. One-third are very likely to invest more in investments that correspond to a particular theme.

“While their appetite for ETFs remains robust, ETF investors are also interested in exploring ways to tailor their investments to their personal situations, goals and preferences,” said Botset. “For some, personalization goals can be met by investing in ETFs that align with their preferences, but for others, new solutions such as direct indexing may offer a more refined approach to meeting their investment and personalization objectives.”

Millennial Snapshot

Schwab has closely followed the attitudes of Millennial ETF investors over the last decade and the research continues to show that this generation has a particular affinity for ETFs. This year’s study found that Millennials are also more interested in personalization than their older counterparts.

Millennial ETF investors have more of their portfolios in ETFs today compared to other generations and they see a larger percentage of their portfolios in ETFs in the next five years compared to Gen X and Boomers. These younger investors are more likely to be extremely confident about their abilities to choose ETFs that can help achieve their investment objectives and to meet their desired investing outcomes. They are primarily focused on building wealth for major life milestones (66%) and saving for retirement (63%).

Millennial ETF investors show greater levels of interest in aligning their investments with their personal beliefs and values and more of them say they will personalize their portfolios further in 2023. Accordingly, Millennials are more interested in newer approaches to investing that allow for the expression of personal preferences like ESG, thematic investing and direct indexing compared to other generations.

“The Millennial generation’s confidence in selecting and usage of ETFs is high,” said Botset. “Additionally, Millennials report the most interest in personalized options such as direct indexing compared to other generations, their adoption of ETFs continues to grow, and ETFs continue to be the preferred option for many at this stage of their investing lives.”

Generational Snapshot – ETF Investors

Millennials

Gen X

Boomers

Percent of portfolio in ETFs today

41%

33%

19%

Expectations for percent of portfolio in ETFs in next five years 48% 40% 26%

Extremely confident in their ability to choose ETFs that can help achieve their investment objectives

59%

48%

26%

Extremely confident in their ability to meet their desired investing outcomes

56%

43%

29%

Extremely important to align their investments with their personal beliefs and values

59%

53%

28%

Very likely to personalize their investments more in 2023

55%

44%

21%

Extremely interested in learning more about direct indexing

59%

49%

16%

Extremely interested in being able to invest in long-term trends or macro themes

62%

57%

36%

Interested in ESG-only portfolios

58%

47%

23%

Across all generations, many investors who are not invested in ETFs are showing interest, which could boost industry growth as these investors turn interest into action. Nearly three-quarters (72%) of non-ETF investors are interested in learning more about ETFs and 41% say they are somewhat or very likely to invest in ETFs in the next two years. The top reason they report for investing in ETFs is to diversify their portfolios (55%).

To read the full report, click here.

About the Study

Charles Schwab & Co., Inc. (Schwab) commissioned Logica Research to conduct an online survey of 2,000 individual investors between the ages of 25 and 75 with at least $25,000 in investable assets, 1,000 of whom have bought or sold ETFs in the past two years and 1,000 of whom have not bought or sold ETFs within the past two years. The study was conducted from June 13 – June 28, 2022. Survey respondents were not asked to indicate whether they had accounts with Schwab. All data is self-reported by study participants and is not verified or validated. Logica Research is neither affiliated with, nor employed by, Charles Schwab & Co., Inc.

About Schwab Asset Management

One of the industry’s largest and most experienced asset managers, Schwab Asset Management offers a focused lineup of competitively priced ETFs, mutual funds and separately managed account strategies designed to serve the central needs of most investors. By operating through clients’ eyes, and putting them at the center of our decisions, we aim to deliver exceptional experiences to investors and the financial professionals who serve them. As of June 30, 2022, Schwab Asset Management managed approximately $575.9 billion on a discretionary basis and $34.4 billion on a non-discretionary basis. More information is available at www.schwabassetmanagement.com.

About Charles Schwab

At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

More information is available at www.aboutschwab.com. Follow us on Twitter, Facebook, YouTube and LinkedIn.

Disclosures:

Investing involves risk including loss of principal. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Schwab Asset Management™ is the dba name for Charles Schwab Investment Management, Inc. Schwab Asset Management and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

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Christine Hudacko Charles Schwab 415-961-3790 christine.hudacko@schwab.com