Millennials embrace bond ETFs more than anyone else: Study

According to a study from Schwab Asset Management, Millennials are the top generation to include ETFs in their portfolios, with 45% of them including fixed-income investments compared to 31% of baby boomers. The study goes on to find that 51% of millennials plan to invest in bond ETFs in 2024. VettaFi Vice Chair Tom Lydon joins Yahoo Finance to break down the study and give his insights as to why millennials are embracing ETFs more than any other generation.

"This new generation of investors, being able to invest on your phone, get broad diversification for low cost, and tax efficiency, it makes all the sense in the world," Lydon says. "We are seeing these net redemptions in these 'long in the tooth' mutual funds as more and more money is shifting over."

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Video Transcript

RACHELLE AKUFFO: Millennials are apparently embracing investing into exchange traded funds more than any other generation. That's according to a new study from Schwab Asset Management. Now, those born between the years of 1981 and 1996 have 45% of their portfolios in fixed income compared to only 31% of those in the baby boomer generation.

And it's only set to increase, as Schwab found that 51% of millennials have plans to invest in bond ETFs in 2024. Let's bring in VettaFi Vice Chair Tom Lydon to discuss ETF strategy. So what are we seeing here in terms of why we're seeing so much of a push here from that generation versus baby boomers who tend to usually like this bond market and like this fixed income space?

TOM LYDON: Well, you're right, Rachelle. Those of us baby boomers, and I'm a baby baby boomer, most of us started investing when mutual funds were hot and we never sold. However, there is a transition that's going on. I was at the Schwab institutional conference last week in Philadelphia, and ETFs are all the buzz.

But behind the scenes, there's some important information. There's $7 trillion in ETFs in the US, and only 20% is in fixed income. However, so far this year, about an equal amount, $150 billion has gone into US equity ETFs and US income ETFs, and especially during a time when we've had rising interest rates.

I think the secret is as we're surveying advisors all the time, most feel that the Fed, if they're not done, they're close to being done of hiking interest rates. And most feel that rates will be lower a year from now. So there's not only an opportunity to go longer duration to lock in that yield, but also pick up on some appreciation if rates actually are cut in the next 12 months.

AKIKO FUJITA: It's on that 45% is a pretty impressive number when you talk about just one subset, right? I mean, we're talking about a specific demographic here. How much of that is recent inflows? Makes sense given where yields are. How much of that is about that having that safety net that the risk-averse sort of steady play when it comes to bonds?

TOM LYDON: Well, Akiko, part of it is the ease of investing. And that's kind of what ETFs are all about. When you think about the online platforms, whether it's brokerage or wealth management, it just makes it very easy. It's very inexpensive compared to mutual funds or active management. It's tax-efficient where you're not getting year-end distributions, which is a whole other story that's going to be talked about in the next 30 days.

So for this new generation of investors, being able to invest on your phone, get broad diversification for low cost and tax efficiency, it makes all the sense in the world. And we're seeing net redemptions in these long in the tooth mutual funds as more and more money is shifting over. Look, it's not that our generation, the older generation, the baby boomers don't like ETFs. They love ETFs, and they're gradually shifting over too. However, they've been investing in brought up in the mutual fund world that has served them very nicely.

RACHELLE AKUFFO: And so for people who have been pouring into things like money market funds looking for some perhaps some alternatives here, what are some of the picks that you like?

TOM LYDON: Well, look, a couple of things. When we're talking about going long duration, one of the ETF's TLT, which is the iShares 20-year treasury, they had $3 billion go in just in the last 30 days. So if you feel that we're top ticking rates at this point, you can actually get a decent yield and actually participate in some appreciation as well.

Outside of that area, there's alternative income strategies that have just been exploding. They're led by JP Morgan's Equity Premium ETF, JEPI, J-E-P-I, where you're actually getting almost 1% a month in alternative income. And this income is options overlay strategies, not even tied to the fixed income market or the Fed. So it's another way to get regular income, but you're diversifying away from whatever the Fed action is.

And then finally, we managed futures is an area that's really coming on strong in the ETF space. The IMGB DBI-managed future ETF is an opportunity to participate in not just rising interest rates where they'll be going short, but also you've got a currency that's wrapped in there, so the dollar continues to look strong over time, and also commodities. So they manage futures in a variety of different ways, where you can actually participate in that, Diversifying, away from bonds and stocks that many people have been doing for the last two years.

AKIKO FUJITA: What about something like corporate credit, Tom? We're talking fixed income.

TOM LYDON: Yeah. So corporate credit, absolutely. So you look at areas like JNK, which is one of the largest corporate credit ETFs. Great yield. And really back to the point of money market funds, $7 trillion in money market funds. Fantastic. Getting almost 5%. But if advisors are right and markets are right that rates are going to be lower a year from now, that 5% yield isn't going to be there.

And if you're stuck in money market funds, you're going to miss out on some appreciation as well. So the key is, don't just be waiting there feeling comfortable with your powder dry. You have to start looking where the puck is going to be a year from now. And advisors are starting to do that. There's more money in motion in the fixed income ETF area than we've ever seen.

AKIKO FUJITA: Time to start putting some of that cash to work. Tom Lydon, VettaFi Vice Chair, appreciate you joining us for today's ETF report brought to you by Invesco QQQ.