What Drives Gen Z’s ETF Choices?

Gen Z might finally be growing up. In terms of their investment behavior, that is.

The cohort, born between 1997 and 2012, are moving from investments in short-term, riskier bets like meme stocks to more traditional investments such as ETFs, according to a recent report in The New York Times. During the Covid-19 pandemic, when stimulus checks and work-from-home lifestyles left young people with cash to spare, day trading took off. But as the world returned to normal, younger investors established themselves in the workforce, and longer-term investing took hold via 401(k) or ETF ownership, said John McKenna, a Cerulli research analyst specializing in investor trends and behaviors.

“Young investors tend to be more risk-tolerant to begin with,” McKenna told ETF Upside. Gen Z’s movement to traditional investments “is less about becoming ‘risk-averse’ and more about gaining more experience with good investing practices and better aligning investing with a long-term goal in mind, like retirement,” he said.

Generational ETF Divide

ETFs have become more popular across all generations, especially millennials, but Gen Z tends to favor individual stocks, McKenna said. Those with ETFs seem to place a higher emphasis on advisor recommendations, he added. Still, 75% of Gen Z holds ETFs in their retirement accounts, second only to millennials. What’s also evident when it comes to Gen Zers’ investment behavior is their reliance on social media which, more often than not, serves as an impetus for further research rather than the sole source of an investment recommendation. Even though “younger generations are more likely to use social media as a form of investment research, it does not mean they are as willing to jump on an investment based purely on the recommendation of social media,” McKenna said.

Nonetheless, data show that young investors need better access to sound financial advice. According to a recent World Economic Forum report:

• Nearly 20% of Gen Zers say they don’t invest because they don’t trust financial institutions.
• The top 10 finfluencers have more than six times the followers of the top 10 financial institutions globally.

The Crypto Vanguard: Notably, young people are at the forefront of crypto investing. Gen Z and millennials put a third of their portfolios into alternative investments and cryptocurrencies compared to less than 10% among older generations. What differentiates Gen Z is their familiarity at a younger age with apps like Coinbase, said Derrick Longo, partner and wealth advisor at Exencial Wealth Advisors.

“Accessibility is giving [Gen Z] the opportunity to start at an earlier age,” Longo said. “That age range is still figuring out what their risk tolerance is through trial and error. There’s a want for easy returns and easy money, not understanding the risks associated with it.”