Far from their reputation as speculative daredevils, millennials are embracing bond exchange-traded funds to a greater degree than other generations as muscle memory from past recessions kicks in.

That’s the finding of an annual study by Schwab Asset Management, which shows that ETF investors born from roughly 1981 to 1996 have 45% of their portfolios in fixed income. That compares to 37% for Generation X — those born from around 1965 to 1980 — and 31% for baby boomers, although older generations may hold debt through mutual funds or other structures. Interest in fixed-income is rising as well, with 51% of millennials planning to invest in bond ETFs next year, versus 45% of their Gen-X counterparts and 40% of baby boomers.

While often associated with risky fringes such as cryptocurrencies and meme stocks, many millennials are actually more conservative than older generations when it comes to investing, says Schwab Asset Management’s David Botset. Repeated recessions and market turmoil — from the global financial crisis to the pandemic onset — have made them more risk averse, a tendency that’s being rewarded as they funnel money into debt with yields at decade-plus highs.

“Consider the market cycles they experienced growing up,” said Botset, the firm’s head of equity product management and innovation. “It makes sense against this backdrop that millennials are drawn to fixed income – particularly at a time when yields are the highest they’ve been in a decade.”

The Federal Reserve’s aggressive tightening campaign combined with its higher-for-longer message on rates have fueled a brutal bond-market selloff, sending yields on 10-year Treasuries above 5% for the first time since 2007 last week. While that’s created pain on a price-return basis, long-term investors — millennials included — are pouring record amounts of money into bond ETFs this year.

Yield Creation
Boomers, for their part, have been leaning toward strategies that create so-called manufactured yield — such as covered-call funds, according to Bloomberg Intelligence. The most popular such fund, the $28.5 billion JPMorgan Equity Premium Income ETF (ticker JEPI), has absorbed nearly $12.6 billion this year, the most of any actively managed ETF.

Most of the assets in this category are held by baby boomers — those born from roughly the mid-1940s to the mid-1960s — or people a generation older, Bloomberg Intelligence ETF analysts Athanasios Psarofagis and Eric Balchunas wrote.

“Given their time horizons, those investors will likely be allocating toward more income-oriented strategies and away from full-on equities,” they wrote.

An overwhelming 89% of millennials say ETFs are their investment vehicle of choice compared to 78% of Gen X and 67% of baby boomers, according to Schwab’s survey, which was conducted in June and polled 2,200 investors aged from 25 to 75. Among the top reasons they prefer ETFs is the ease of trading, followed by low costs and tax efficiency.

That demand among millennials has helped propel US ETF assets to roughly $7 trillion, from $1.7 trillion a decade ago. While equity funds make up the bulk of the industry, fixed-income ETFs have climbed to $1.4 trillion from about $255 billion in that span.

“The really exciting thing is because they are generally in their 30s and 40s, they have money to invest,” Salim Ramji, global head of iShares and index investments at BlackRock Inc., said during Bloomberg Indices’ ‘Future of Fixed Income’ conference in New York last week. Millennials are “effectively defaulting into ETFs as their choice for how to invest in markets.”

This article was provided by Bloomberg News.