Why child boomers maintain extra mutual funds than ETFs

Regardless of ongoing investor demand for exchange-traded funds, child boomers seem like bucking that development, new analysis reveals. Specialists 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 yr, in keeping with 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 complete 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 buyers: 1,000 who take part in ETFs and one other 1,000 who do not. From that pattern, 16% have been boomers, 35% have been Gen X and 43% have been millennials.

On the similar time, child boomer households have been the biggest share of mutual fund homeowners in 2024, at 35% in keeping with a separate report from the Funding Firm Institute. The following-largest mutual fund–proudly owning family generations have been Gen X, at 28%, and millennials, at 25%.

And therein lies the friction: Child boomers personal quite a lot 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 price much less and are tax environment friendly, specialists say not so quick.

“On the floor, the reply might be sure,” that they need to swap their mutual fund property to related ETFs, Sotiroff mentioned.

“However for those who dig a little bit deeper, the reply is perhaps no,” he mentioned. That transfer could show unexpectedly costly.

ETFs started gaining traction within the 2000s as a method to put money into 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 monitor an index, and efficiency is predicated on that of the index.

Usually, the benefit with ETFs is their decrease price, tax effectivity and intraday tradability. As of Sept. 30, ETFs held $12.7 trillion in property, up from $1 trillion on the finish of 2010, in keeping with Morningstar Direct.

Whereas mutual funds’ property are a lot increased at $22 trillion, more cash is leaving them than getting into. 

This yr by 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.

Boomers, who vary in age from 61 to 77 and have been largely the era that started utilizing mutual funds in earnest to put money into 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 just isn’t a taxable occasion as a result of features are tax-deferred and any withdrawals usually are taxed as peculiar 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 features, that are topic to taxation. Meaning a possible tax invoice that has every kind of repercussions for those who’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 value $70,000 or $80,000, for those who go and promote, that is an enormous capital acquire,” mentioned licensed monetary planner Douglas Kobak, the principal and founding father of Foremost Line Group Wealth Administration in Park Metropolis, Utah.

Assuming you have owned the fund for greater than a yr, the expansion can be taxed at a long-term capital features tax price of 0%, 15% or 20%, relying in your adjusted gross earnings. In any other case, it is taxed at peculiar earnings tax charges.

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. 

Revenue-related month-to-month adjustment quantities, or IRMAAs as they’re referred to as, are added to the usual premiums for Half B outpatient care protection and Half D prescription drug protection for enrollees with increased earnings.

In 2025, IRMAAs apply to incomes above $106,000 for single tax filers and $212,000 for married {couples} submitting collectively. (Subsequent yr’s specifics haven’t been launched but.) The upper the tax bracket, the better the surcharge quantity. And, your tax return from two years earlier is used to find out whether or not you pay IRMAAs.

Moreover, for those who can be promoting an actively managed mutual fund for a passively managed ETF, keep in mind that its efficiency will depend upon that of the index it tracks, for higher or worse.

“It is actually a query of, ‘Do I need that passive method in [a particular] asset class relative to what is going on on within the economic system round me, or am I higher off in that energetic mutual fund?'” mentioned CFP William Shafransky, a senior wealth advisor with Moneco Advisors in New Canaan, Connecticut.