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Regardless of ongoing investor demand for exchange-traded funds, child boomers look like bucking that pattern, new analysis reveals. Consultants say there could also be a superb motive for it.
Solely 6% of surveyed child boomers — these born 1948-1964 — say they plan to “considerably enhance” their ETF investments within the subsequent 12 months, based on a new research from Charles Schwab. That compares with 32% of millennials — these born 1981-1996 — and 20% of Era X, born 1965-1980.
Boomers are additionally the era least prone to say they’re open to placing their total portfolio in ETFs within the subsequent 5 years, with 15%, versus 66% for millennials and 42% for Gen X.
Schwab’s analysis research into ETF investing has been ongoing for greater than 10 years. In 2025, it collected responses from 2,000 traders: 1,000 who take part in ETFs and one other 1,000 who do not. From that pattern, 16% had been boomers, 35% had been Gen X and 43% had been millennials.
On the similar time, child boomer households had been the most important share of mutual fund homeowners in 2024, at 35% based on a separate report from the Funding Firm Institute. The subsequent-largest mutual fund–proudly owning family generations had been Gen X, at 28%, and millennials, at 25%.
And therein lies the friction: Child boomers personal lots of mutual funds — and possibly have for a very long time, mentioned Dan Sotiroff, senior analyst on passive methods analysis at Morningstar. Whereas on the floor it will appear they need to promote their mutual funds and purchase comparable ETFs as a result of they value much less and are tax environment friendly, specialists say not so quick.
“On the floor, the reply might be sure,” that they need to change their mutual fund belongings to related ETFs, Sotiroff mentioned.
“However when you dig a little bit deeper, the reply is perhaps no,” he mentioned. That transfer could show unexpectedly costly.
Why traders favor ETFs
ETFs started gaining traction within the 2000s as a technique to spend money on a fund with a mixture of underlying investments, much like their cousin, mutual funds. Whereas many mutual funds are actively managed — that means professionals are on the helm selecting the investments — most ETFs are passively managed as a result of they observe an index, and efficiency is predicated on that of the index.
Typically, the benefit with ETFs is their decrease value, tax effectivity and intraday tradability. As of Sept. 30, ETFs held $12.7 trillion in belongings, up from $1 trillion on the finish of 2010, based on Morningstar Direct.
Whereas mutual funds’ belongings are a lot larger at $22 trillion, extra money is leaving them than stepping into.
This 12 months by way of Sept. 30, mutual funds noticed an outflow of $479.4 billion, in contrast with ETFs taking in $922.8 billion in new cash, Morningstar knowledge reveals.
A ‘large capital acquire’ for long-term traders
Boomers, who vary in age from 61 to 77 and had been largely the era that started utilizing mutual funds in earnest to spend money on the inventory market, is perhaps sitting on funds they’ve owned for years, if not a long time.
In the event that they’ve held these funds in a 401(ok) or particular person retirement account, promoting and shopping for an ETF isn’t a taxable occasion as a result of good points are tax-deferred and any withdrawals typically are taxed as atypical earnings (or are tax-free in a Roth) in retirement.
But when these mutual funds are in a brokerage account — and have been for a very long time — the proprietor could also be sitting on vital capital good points, that are topic to taxation. Which means a possible tax invoice that has every kind of repercussions when you’re among the many older boomers.
“If you happen to’ve put, say $20,000 right into a mutual fund years in the past and it is now price $70,000 or $80,000, when you go and promote, that is an enormous capital acquire,” mentioned licensed monetary planner Douglas Kobak, the principal and founding father of Important Line Group Wealth Administration in Park Metropolis, Utah.
Assuming you’ve got owned the fund for greater than a 12 months, the expansion can be taxed at a long-term capital good points tax price of 0%, 15% or 20%, relying in your adjusted gross earnings. In any other case, it is taxed at atypical earnings tax charges.
Good points might set off Medicare surcharge
Along with a possible tax invoice, Kobak mentioned, that acquire could push the investor into a better tax bracket, which comes with implications for retirees enrolled in Medicare.
Earnings-related month-to-month adjustment quantities, or IRMAAs as they’re known as, are added to the usual premiums for Half B outpatient care protection and Half D prescription drug protection for enrollees with larger earnings.
In 2025, IRMAAs apply to incomes above $106,000 for single tax filers and $212,000 for married {couples} submitting collectively. (Subsequent 12 months’s specifics haven’t been launched but.) The upper the tax bracket, the larger the surcharge quantity. And, your tax return from two years earlier is used to find out whether or not you pay IRMAAs.
Moreover, when you can be promoting an actively managed mutual fund for a passively managed ETF, keep in mind that its efficiency will rely on that of the index it tracks, for higher or worse.
“It is actually a query of, ‘Do I need that passive strategy in [a particular] asset class relative to what is going on on within the financial system round me, or am I higher off in that lively mutual fund?'” mentioned CFP William Shafransky, a senior wealth advisor with Moneco Advisors in New Canaan, Connecticut.
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