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Warren Buffett recently said for the umpteenth time that the stock market is increasingly casino and while individual equities are likely to remain lynchpins of many investors’ portfolios, the reality is many market participants are embracing index funds.
The recently published FTSE Russell Wealth Survey confirms that index funds are huge hits among retail investors and after a few years of the meme stock craze – one that could be rekindled at a moment’s notice – it’s likely a relief to advisors that clients aren’t treating the entirety of their discretionary accounts like a craps game on the Las Vegas Strip.
Before delving into the details of the survey, it should be noted that the term “index fund” is used throughout while “exchange traded fund” is not. I’ll take the leap of faith and assume that high levels of index fund adoption and satisfaction include ETFs and the data support that assertion.
One the details from the study that stands out is the fact that investors that use index funds (and presumably ETFs) are more satisfied (91%) than their peers that do not (79%). That’s just one of the survey’s points advisors should acknowledge.
Index Funds Aren’t Just for Older Investors
Index funds have been around for five decades and ETFs in this country are more than three decades old. That might imply these products are primarily the territory of older retail investors and while passive funds have high rates of penetration among season market participants, these products are also highly adopted by younger investors.
“Index fund use has grown over the two years since our last survey in 2022 across all age groups, rising from 27% of all investors to 39%. Yet Millennials’ ownership has grown the most—up from 27% in 2022 to 45% in 2024. Younger Millennials are most enthusiastic of all. More than half (51%) of those aged 28-34 invest in index funds,” notes FTSE Russell.
In fact, on a percentage basis, millennials have more of their portfolios allocated to index funds than do their older counterparts in the Gen X and baby boomer demographics. That’s encouraging because from that it can be inferred that not only do younger investors like the low fees and tax advantages associated with ETFs and index funds, but perhaps they’re also weaning themselves off selecting individual stocks with dubious characteristics.
Important News for Advisors
Advisors know that they are among the biggest drivers of ETF and index fund adoption – a trend that’s gaining, not losing momentum. That doesn’t mean advisors are cannibalizing themselves by endorsing index funds to clients.
Actually, the opposite is likely true. As FTSE Russell points out, index funds provide advisors with the opportunity to educate clients and offer guidance. Most clients love both of those. Add to that, the ETF universe continues expanding at a rapid pace and more choices can lead to confusion and that confusion can lead clients to advisors for assistance. Point is increased index fund usage doesn’t have to equate to a lower client base.
“With retail investors steadily increasing their use of index funds, advisors can help them to understand the benefits. They have a particular opportunity to engage with Millennials, who are leading the move into index investing but using advisors less,” concludes FTSE Russell.
Related: Words of Caution on Active Bond ETFs