State Street Global Advisors' 2024 US ETF Impact Survey: Key Takeaways and ETFs to Watch

Finding #1: Demographic differences in ETF usage

"The use of ETFs by individual investors is highest among younger individuals, as 58% of Millennial investors report they hold ETFs, compared to 47% of Gen Xers and 37% of Baby Boomers."

The survey's finding on the demographic differences in ETF usage highlights a generational gap, with younger investors leading the adoption. Personally, I see this shift largely due to what's often termed the "gamification" of investing, paired with the varying levels of technological savvy across generations.

What do I mean by this? Well, modern brokerages have rolled out easy-to-use mobile apps with slick user interfaces, a significant evolution from the clunkier desktop portals of yesteryears. These advancements make investing more accessible than ever.

If you're familiar with buying a stock, you're just as capable of buying an ETF, thanks to the absence of minimum investment requirements—especially with the advent of fractional shares—and the rise of commission-free trading platforms.

For example, instead of placing an order for the Vanguard 500 Index Fund Admiral Shares (VFIAX), which requires a $3,000 minimum investment and fills at the end of the trading day, a Millennial or Gen Z investor might find it more intuitive and financially feasible to purchase shares of the Vanguard S&P 500 ETF

through an app like Robinhood.

Finding two: Reasons for buying ETFs

"The top reasons individual investors cite for holding ETFs in a portfolio include diversification benefits (49%), access to specific asset classes/exposures (47%) and lower costs/expense ratios (39%)."

This finding underscores the versatility and adaptability of the modern ETF industry, which continues to evolve to meet the varied needs of individual investors.

Diversification is a cornerstone of the ETF appeal. Take the Vanguard Total World Stock Index Fund ETF (VT), for example. It offers market-cap-weighted exposure to over 9,000 U.S., international developed, and emerging market equities, all for a mere 0.07% expense ratio.

Access to specific asset classes or themes is another area where ETFs excel. As I've highlighted in the "There's an ETF for That?" series, the range of ETFs available today means you can find one to suit nearly any investment thesis. For instance:

• For those interested in exotic fixed income securities like collateralized loan obligations, there's the Janus Henderson AAA CLO ETF
  JAAA
  -0.02%
  .
• If you're looking to invest in the global music industry, consider the MUSQ Global Music Industry ETF
  MUSQ
  +0.95%
  .
• For direct cryptocurrency exposure, there are options like the Grayscale Bitcoin Mini Trust (BTC) and the Grayscale Ethereum Mini Trust
  ETHA
  +1.88%
  .
• And for those seeking complex hedge fund-like strategies, there's the iMGP DBi Managed Futures Strategy ETF
  DBMF
  -0.15%
  and the KraneShares Mount Lucas Managed Futures Index Strategy ETF
  KMLM
  +0.72%
  .

Finally, lower expense ratios continue to be a significant draw. The JPMorgan Equity Premium Income ETF

is a prime example, offering active management with a covered call overlay for just a 0.35% expense ratio. Moreover, the ETF industry even boasts 0% expense ratio options like the BNY Mellon US Large Cap Core Equity ETF

BKLC

-0.07%

.

Finding three: Ongoing knowledge gaps

"Among individuals who do not own ETFs, a significant knowledge gap exists with 71% reporting the tax efficiency of ETFs is difficult to understand compared to 48% of ETF investors. Similarly, more than two-thirds of investors (69%) who don't own ETFs say ETF pricing is difficult to understand (compared to 35% of ETF investors) and more than half (57%) say they have a difficult time understanding the difference between mutual funds and ETFs (compared to 23% of ETF investors)."

These findings highlight a pressing need for enhanced education and engagement from ETF industry professionals to bridge the knowledge gaps identified. I'll contribute to this effort by clarifying some of the complexities surrounding ETFs.

One key advantage of ETFs over equivalent mutual funds is their tax efficiency. This is primarily due to the creation/redemption mechanism unique to ETFs.

When ETF shares are created or redeemed, the transactions typically involve the exchange of securities for shares of the ETF, rather than cash transactions. This method of in-kind transfers helps avoid the realization of capital gains that would otherwise occur if securities were sold for cash, thus enhancing the tax efficiency for investors.

Understanding ETF pricing can be tricky. Like mutual funds, ETFs have a Net Asset Value (NAV), calculated by subtracting liabilities from assets and then dividing by the number of shares outstanding.

However, ETFs also have a market price, which is what they trade for on the exchange. To prevent ETFs from trading at significant premiums or discounts to their NAV (a common issue with closed-end funds), the ETF structure allows authorized participants to engage in arbitrage.

These participants can create or redeem ETF units as necessary to align the market price closely with the NAV, ensuring fair pricing for investors.

Finally, here's a table that breaks down the differences between mutual funds and ETFs, focusing on aspects like tax efficiency, trading, fees, sales loads, and minimum investment requirements:

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.