- Millennials represent the fastest-growing segment of the exchange-traded fund market, according to a survey conducted by BlackRock’s iShares business.
- Martin Small, the head of US iShares at BlackRock, which oversees more than $US1 trillion, has some ideas why.
- He also explains why baby boomers have been slow to adopt ETFs and how they could be the next frontier of growth.
It features Martin Small, who’s responsible for more than $US1 trillion as the firm’s US head, holding an electric guitar. And in between impressive displays of shredding, Small makes an analogy between playing the instrument and investing in ETFs.
The connection is simple: ETFs give people unprecedented flexibility in creating portfolios, similar to how the chord combinations afforded by the electric guitar revolutionised music as we know it.
It’s a fun three-minute segment – and that’s the point. The video is part of a concerted effort by iShares to sell the public on ETF investing. And based on a recent survey conducted by the provider, it’s working, especially with youngsters.
Roughly 42% of the millennials surveyed own ETFs, up from 33% last year, the biggest jump out of any category, according to a poll of more than 1,000 people conducted by iShares. Further, 85% of millennials surveyed said they were planning to buy ETF exposure in the next year.
These results would suggest that BlackRock and other fund providers have successfully tapped into the millennial market – the fastest-growing segment of the investment universe. So we decided to ask Small to explain why.
‘A natural level of comfort’
The first part of his explanation deals with how closely intertwined the maturation of millennials has been with a period of rapid growth for ETFs – a market that saw combined US assets hit $US3.3 trillion in November, a roughly $US900 billion single-year increase, according to Investment Company Institute data.
Small points out that the funds have been around for as long as young potential investors may have had an eye on the market.
“ETFs are about as old as the World Wide Web, so millennials grew up with them,” Small told Business Insider. “They have always been around, so there’s just a natural level of comfort.”
ETFs have always kept their promises to millennials.
The second relates to an unfortunate reality facing millennials: They’re the lowest-earning generation in modern history. This means they have less money to invest and a lower cost threshold when it comes to putting that capital to work. But while these factors might initially seem like deterrents, Small thinks cheap-by-comparison ETFs have actually been well-positioned to help youngsters invest.
“It’s a generation that’s always had to do more with less,” he said. “With an ETF, you can put $US100 to work if you want. There are very few mutual-fund complexes with minimum investments lower than thousands of dollars.”
Small also notes that ETFs have done an excellent job mirroring the indexes or strategies they track.
“ETFs have always kept their promises to millennials,” he said. “They have always delivered the market return at low cost, and that’s earned a tremendous amount of trust.”
Boomers have been slow to adopt ETFs, but they could be the next frontier of growth
As millennials make up the driving force of ETF adoption, their parents have been far more reluctant to take the plunge.
Only 27% of baby boomers, ages 52 to 70, are invested in ETFs, the least of any group, according to the iShares survey. Small says this is most likely a byproduct of the huge sums of money sitting in retirement accounts that haven’t yet been “ETF-ized,” as he describes it.
He also thinks it’s possible that boomers have been somewhat spoiled by the ongoing equity bull market, which is now the second-longest on record.
“They have seen some of the largest names in the market produce super-normal returns,” Small said. “That sense of being able to beat the market overhangs some of their thinking. You see less of that from the generations that are on either side.”
ETFs are starting to become modular building blocks for retirees.
But boomers are far from a lost cause, Small says. He points to the surprising growth in adoption by the so-called silvers group, ages 71 and up, which nearly doubled from the previous year.
That spike in adoption is likely a result of silvers increasingly treating ETFs as viable retirement assets, Small says. And he predicts that as boomers start to liquidate their retirement accounts, their ETF adoption rates will see a similar surge.
“At the end of the day, ETFs are starting to become modular building blocks for retirees,” he said. “They’re becoming valuable retirement tools. It’s a leading indicator of what we could see from boomers in the future.”