CHICAGO — Advisors failing to embrace ETFs will miss out on the next generation of clients.

While only 42% of millennial investors say their portfolios currently hold an ETF, 91% say the funds are their investment vehicles of choice, according to Schwab’s annual ETF investor study.

“Within a decade, we’ve seen ETFs grow to the point where investors now see them as a foundational investment vehicle,” says Heather Fischer, vice president of ETF and mutual fund platforms at Schwab. “While [this] sentiment is particularly pronounced among millennial investors, it is reflected strongly across generations and genders.”

Millennials are drawn to ETFs because of their exposure to the products, says Kari Droller, Schwab's vice president of third-party mutual funds, ETF and 529 plans.

"They grew up with ETFs,” Droller said at the 30th annual Morningstar Investment Conference in Chicago. “It’s a product that’s been in the investment landscape since the first dollar they have invested. So, part of it is just that they are accustomed to that and just more comfortable with ETFs.”

The survey polled 1,500 investors between the ages of 25 to 75 with at least $25,000 in investable assets who recently purchased ETFs. Of those respondents, 29% were directed to ETFs by an advisor. Almost half (46%) say they chose their own.

Millennials are more drawn to ETFs because of their appetite for technology, Droller says. While a combined 25% of all survey respondents say their ETFs are selected by an automated investing platform or portfolio-building tools, 38% of millennials in that group say tech platforms helped expose them to the products.

“We are seeing millennials in a greater proportion using robos and technology-enabled self-directed portfolio building tools,” Droller says. “A lot of those (tools) are using ETFs; so there is a heightened exposure with millennials to ETFs.”

There's increased interest in these funds beyond the younger generation as well. More than half of all ETF investors expect to increase their investment in the funds in the next year. Many (83%) say they are invested in ETFs for flexibility in market swings, with 67% of respondents saying they plan to allocate more to the products during periods of volatility. As many as 79% of millennial investors say ETFs will be their primary investment vehicle for the future, up from 63% last year.

Slideshow
8 factors driving explosive ETF growth
Above all others, millennials are likely to include the funds in their portfolios, Schwab says.

ETFs are gaining popularity as distributors start to take larger steps towards rebranding and marketing the products, according to Jim Devaney, head of sales distribution at PGIM Investments

“I think every advisor is at least acutely aware of using ETFs, even with their older generation of clients,” Devaney says. “The big thing distributors are really working towards is how to make sure they have cross-generational relationships to make sure when assets are passed that the advisor has a choice.”

PGIM, the investment management arm of Prudential Financial, has gone as far as rebranding from Prudential Investments to reflect the firm’s focus on being a multi-manager model that includes ETFs. The firm launched its first ETF, the PGIM Ultra Short Bond ETF (PULS), in April.

“I don’t think it’s an ETF or mutual fund-only (approach) for the marketplace,” he explains. “I think you’re seeing advisors fully embrace multiple vehicles, even for their older clients.”

Andrew Shilling

Andrew Shilling

Andrew Shilling is an associate editor for Financial Planning, Bank Investment Consultant, On Wall Street and Money Management Executive. Follow him on Twitter at @AndrewWShilling.