Why baby boomers hold more mutual funds than ETFs
Flashpop | Digitalvision | Getty Images
Despite investors’ continued demand for exchange-traded funds, baby boomers appear to be bucking the trend. research shows. Experts say there may be a good reason for this.
Only 6% of baby boomers (born 1948-1964) surveyed say they plan to “significantly increase” their ETF investments next year. New study from Charles Schwab. This rate corresponds to 32% of Generation Y (born in 1981-1996) and 20% of Generation X (born in 1965-1980).
Boomers are also the least likely to say they are open to putting their entire portfolio in ETFs in the next five years, at 15 percent; This rate is 66 percent for Generation Y and 42 percent for Generation X.
Schwab’s research work on ETF investing has been ongoing for over 10 years. In 2025, it collected responses from 2,000 investors: 1,000 participating in ETFs and 1,000 not participating. Of this sample, 16% were Boomers, 35% were Generation X, and 43% were Millennials.
At the same time, baby boomer households accounted for the largest share of mutual fund owners at 35% in 2024, according to a separate report from the Investment Company Institute. The next largest mutual fund-owning household generations were Generation X at 28% and Generation Y at 25%.
And therein lies the friction: Baby Boomers own lots of mutual funds and likely have for a long time, said Dan Sotiroff, senior analyst for passive strategies research at Morningstar. While it may seem like they should sell mutual funds and buy similar ETFs, experts say it’s not that fast.
“On the face of it, the answer is probably yes,” Sotiroff said of whether they should switch mutual fund holdings to similar ETFs.
“But if you dig a little deeper, the answer might be no,” he said. This move could be unexpectedly expensive.
Why do investors choose ETFs?
ETFs began gaining traction in the 2000s as a way to invest in a fund that contains a mix of underlying investments, similar to their cousins mutual funds. While many mutual funds are actively managed (that is, they have professionals selecting the investments), most ETFs are passively managed because they track an index and performance is based on the performance of the index.
In general, the advantage of ETFs is their low cost, tax efficiency, and availability for intraday trading. As of Sept. 30, ETFs had $12.7 trillion in assets, up from $1 trillion at the end of 2010, according to Morningstar Direct.
Although mutual funds have much higher assets at $22 trillion, more money comes out of them than comes in.
Mutual funds have recorded $479.4 billion in outflows through Sept. 30 this year, while ETFs have raised $922.8 billion in new money, according to Morningstar data.
‘A huge capital gain’ for long-term investors
Boomers, who range in age from 61 to 77 and largely consist of the generation that began seriously using mutual funds to invest in the stock market, may be sitting on funds they’ve owned for years, if not decades.
If they hold those funds in a 401(k) or individual retirement account, selling and buying an ETF is not a taxable event because the gains are taxable and any withdrawals are generally taxed as ordinary income in retirement (or tax-free in a Roth).
But if those mutual funds are in a brokerage account (and have been for a long time), the owner may be sitting on them. significant capital gains that are subject to tax. That means a potential tax bill with all kinds of repercussions if you’re among older Boomers.
“If you invested, say, $20,000 in a mutual fund years ago and now it’s worth $70,000 or $80,000, that’s a huge capital gain if you go and sell it,” said certified financial planner Douglas Kobak, principal and founder of Main Line Group Wealth Management in Park City, Utah.
Assuming you’ve owned the fund for more than a year, growth will be taxed at a long-term capital gains tax rate of 0%, 15%, or 20%, depending on your adjusted gross income. Otherwise, it is taxed at ordinary income tax rates.
Earnings may trigger Medicare surcharge
In addition to a possible tax bill, this gain could push the investor into a higher tax bracket, which could have negative consequences for registered retirees, Kobak said. Medicare.
Income-related monthly adjustment amounts, or IRMAAs These are added to standard premiums for Part B outpatient coverage and Part D prescription drug coverage for higher-income enrollees.
In 2025, IRMAAs will apply to income over $106,000 for single tax filers and over $212,000 for married couples filing jointly. (Next year’s details have not yet been announced.) The higher the tax bracket, the higher the surcharge. And your tax return from two years ago is used to determine whether you should pay IRMAAs.
Additionally, if you are trading an actively managed mutual fund for a passively managed ETF, keep in mind that its performance will depend, for better or worse, on the performance of the index it tracks.
“It’s really a question: ‘Do I want this passive approach? [a particular] “Is this part of the asset class based on what’s going on in the economy around me, or am I better off in an active mutual fund,” said William Shafransky, CFP, senior wealth advisor at Moneco Advisors in New Canaan, Connecticut. he said.
