A new ETF demographic
Millennials and women are increasing their use of exchange traded funds (ETFs) in their investment portfolios as they seek to grow their wealth and diversify their risks. Both groups are helping to drive the growth of the ETF industry as it heads towards a $140 billion market capitalisation by the year’s end.
Australia is a nation of investors with close to nine million adult Australians holding investments outside their superannuation and residential property, according to the 'ASX Australian Investor Study 2020’. Increasingly, women and millennials are investing in ETFs which enable diversification beyond holding a handful of shares. Women made up 45% of all new investors in the past 12 months, up from 31% five years ago.
20 years ago, women made up just one-in-10 ETF investors. Today, they reportedly account for one-in-four ETF investors. Record low interest rates, increased savings and the desire to secure economic freedom are encouraging more women and millennials to invest in ETFs and govern their own future with their investment decisions. Research has found that women too are flocking to responsible investments more than men, and ETFs have opened up the options.
Significantly, the Australian Securities Exchange (ASX) study found that ‘next generation investors’, or people aged 18 to 24 years, are drawn to ETFs more than shares. This age group is the least likely to hold Australian shares directly (36%, compared to 77% of retirees), but they are the most likely to invest in ETFs (20% versus 7% of retirees), as shown in Chart 1.
Chart 1: Next generation investors
Source: ASX Australian Investor Study 2020.
Like women, younger investors are drawn to ETFs for several reasons, including their low cost, accessibility and convenience. Investing in one share represents an investment in one company; ETFs enable people to invest in a range of companies or assets in just one trade on the ASX, saving time and money.
A distinct increase in the number of female key opinion leaders in the industry has helped to fuel more women into ETFs and self-directed investments. The top money podcast in Australia, She’s on the Money, is hosted by millennial money expert and financial adviser, Victoria Devine, while a plethora of female ‘finfluencers’ like Tash Invests have garnered swathes of followers online. Another top finance podcast, Equity Mates recently pivoted to launch You’re in Good Company, another finance podcast targeting young female millennials and the Zoomer generation.
MILLENNIAL INVESTING
The proliferation of investing apps has also made investing more accessible and much cheaper; Superhero, Sharesies, Commsec Pocket and Stake are streamlining investment online and typically have no or a very low minimum investment levels. Some of these platforms offer zero brokerage fees, target millennials with their investor education and promote the convenience of long-term investing through ETFs.
In the US, a study published in mid-2021 has similarly found millennials are continuing to outpace generation X and baby boomers in ETF adoption. Over the next year, 29% of millennial ETF investors plan to significantly increase investments in ETFs, compared to 23% of Gen X investors and 9% of boomer investors, according to the ‘ETF Investor Study’ by Charles Schwab and Co. Millennials estimate that in five years, 43% of their portfolios will be in ETFs, compared to 39% for Gen X and 29% for boomers. This move to ETFs is coming at the expense of individual stocks, with more than half of millennials surveyed saying they have dumped all their equity holdings for ETFs.
Reflecting the broad appeal of ETFs, the VanEck survey found that 89% of respondents said they would recommend ETFs to other investors, reinforcing that ETFs are the topic du jour when talking investments. ETFs open up opportunities in asset classes which may not have been previously available to retail investors including offshore equities and assets such as infrastructure and property. The expected increase in usage will drive further growth of the ETF market in Australia as it heads towards a market capitalisation of $140 billion by end of 2021 and $200 billion in the next two years.
With its growth so far, we have seen the range of ETFs develop from simple market capitalisation index-tracking ETFs to smart beta ETFs to active ETFs. Popular investment themes such as environmental, social and governance (ESG), clean energy and video gaming are drawing in the younger demographic and those investors who want to align their values with their investment dollars.
A recent survey conducted by RBC Wealth Management shows women in particular are driving demand for socially responsible investing, or ESG. Women are more than twice as likely as men to say it is extremely important that the companies in which they invest in integrate ESG factors into their decisions. Importantly, among the other ESG factors, when it came to the “S” in social, women ranked human rights at 80%, workplace health and safety at 75%, and social justice at 64% as the most important elements for them.
This is just one reason why funds are pouring into ESG and thematic ETFs listed on the ASX. Over the six months to 31 August, 2021, funds under management (FUM) in thematic ETFs grew by 39% to $5.1 billion, while FUM in sustainable investment or ESG ETFs jumped 53% to $4.6 billion. That growth easily exceeded growth in FUM of ASX-listed market capitalisation ETFs which grew by 25% to $75 billion. Growth in VanEck thematic ETFs grew by even more, at 126% to a FUM of $191 million.
Shut out of property
Other factors have driven millennials into ETFs. Millennials, in particular, have been shut out of the Australian property market given the very high cost of real estate. Equities are more equitable because they are more accessible than property and offer comparable, if not better, returns over the long term and are less sensitive to interest rate rises. ETFs do not demand a huge stamp duty slug or require a deposit. You can invest much smaller amounts of money, unlike the property market, which demands a huge chunk of your investment dollars and is often a life-long commitment.
Australians too, including women, have greater wealth to invest. Net Australian household worth rose to a fresh record high of $13.43 trillion in the second quarter of 2021 and wealth per capita rose to a record high of $522,032. Household cash deposits rose to record $1.34 trillion. This cash is waiting to be invested, and some of it will go into ETFs.
Lockdowns too have forced us to save and given us more money to invest. Commonwealth Bank economists estimate that Australians have amassed around $230 billion in extra savings during lockdowns, enabling those ‘stuck-at-home’ to invest in value adding assets such as ETFs. The nation’s prosperity has gained through the pandemic and government support has helped to put money into women’s and millennials’ pockets which is waiting to be invested. In many cases, there is nowhere else to spend that money.
As we enter 2022, the push of millennials and women into ETFs will only likely gain momentum. With interest rates close to zero on cash and government bonds offering minuscule yield, women and millennial investors have been forced to look elsewhere to draw a decent income. ETFs are democratising investing so that now all types of investors can buy the exact same exposure that were once only available to institutional or high-net-worth investors.
Alice Shen is senior associate - investments and capital markets at VanEck.
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