Want younger clients? Help them with ETFs

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3 mins read

The Australian ETF market grew 39% last year to $35.4 billion and 314,000 investors.  Many of these were young first-timers, presenting an opportunity for financial advisers to engage a new generation of investors.1

From just $5 billion funds under management in 2011, there are predictions the local Exchange Traded Fund (ETF) market could reach $45 billion this year. 2

The latest BetaShares/Investment Trends ETF report shows first time investors are getting younger, with an average age of 42, down from 56 just five years ago. The keenest interest is coming from Millennials (21-35), with 38% saying they use or intend to use ETFs in the next 12 months compared with 32% of Gen X and 27% of Baby Boomers.

This trend is even more marked in the US, where a whopping 85% of Millennials plan to allocate new investment to ETFs in the next 12 months, according to a recent BlackRock report.

What’s the attraction?

BetaShares Head of Strategy, Ilan Israelstam says the primary appeal of ETFs for Millennials is simplicity. “They probably find investing confronting; they don’t have a lot of money and they don’t have a lot of experience in the market. ETFs allow them to gain experience in a simple trade which takes a lot of the guesswork out of investing for them”, he says.

The main reasons people give for using ETFs are diversification, access to overseas markets and liquidity, according to the BetaShares report. But Israelstam says Millennials are also quite savvy about costs. The average expense ratio of an ETF is 30-50 basis points, compared with an average 1.0-1.5% for traditional managed funds.

ETFs also offer access to stocks and market sectors that resonate with younger investors but are difficult to source on the local market, such as technology, robotics and cybersecurity and sustainability. Millennials want to know how to invest in the likes of Google, Facebook, Amazon and Netflix; they also want to invest sustainably.

“We know that ethical and sustainable ETFs are being bought by Millennials – they want to invest responsibly”, says Israelstam. He says BetaShares ETHI (Global Sustainability Leaders) and FAIR (Australian Sustainability Leaders) have attracted a combined $300 million since listing. Russell and UBS also offer a range of ethical ETFs.

While ETFs are simple and easy to use, young investors still need advice on investment selection, putting their investments into an asset allocation framework, and tax. With more than 220 ETFs currently traded on the ASX from a dozen providers, evaluating the options can be confusing for inexperienced investors. Last year alone there were 21 new listings.3

Yet despite the rapid expansion of the ETF market, only 23% of investors say advisers played a role in their most recent ETF investment.

Israelstam says Millennials are hungry for information and many would be happy to engage with an adviser. “Millennials and ETFs go hand in hand. If you think the stats about ongoing ETF adoption are only going in one direction, then becoming a topic expert in the area will make advisers attractive to Millennials,” he says.

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1 BetaShares/Investment Trends 2017 Exchange Traded Funds Report, 4 April 2018

3 As above

Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only. BetaShares is an external entity that is not a member of the Commonwealth Bank of Australia Group of Companies (the Group) and the content or any view expressed by BetaShares and its employees does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. CBA, nor members of the Group accept any liability for losses or damage arising from any reliance on external parties their products, services and material. Past performance is no guarantee of future performance.