Baby boomers are less bullish on ETFs than younger generations, research finds — with good reason

New research from Charles Schwab reveals that baby boomers are significantly less likely than younger generations to increase their ETF investments or shift their portfolios, despite strong overall ETF demand and mutual fund outflows. This trend is largely driven by the substantial capital gains tax implications boomers would face from selling long-held mutual funds in taxable accounts, which could trigger higher tax brackets and Medicare surcharges. While ETFs offer cost and tax efficiency benefits, these embedded gains create a significant disincentive for portfolio reallocation among this demographic, impacting broader asset flow dynamics.

Analysis

Charles Schwab research indicates a significant divergence in investment behavior, with only 6% of baby boomers planning to "significantly increase" ETF investments in the next year, compared to 32% of millennials and 20% of Gen X. This contrasts sharply with the broader market trend of substantial inflows into ETFs ($922.8 billion YTD Sept 30) versus outflows from mutual funds ($479.4 billion). Boomers also represent the largest share of mutual fund owners at 35% of households, according to the Investment Company Institute.

This reluctance stems primarily from potential capital gains tax liabilities associated with selling long-held mutual funds in taxable brokerage accounts. Experts highlight that boomers, many of whom have held these funds for decades, could face significant tax events, such as a $20,000 investment growing to $70,000-$80,000, triggering long-term capital gains taxes. Such gains could also push retirees into higher income brackets, leading to increased Medicare Part B and D premiums (IRMAAs), applicable for incomes above $106,000 for single filers in 2025.

While ETFs generally offer lower costs, greater tax efficiency, and intraday tradability compared to mutual funds, the embedded capital gains for many boomers create a substantial disincentive for portfolio reallocation. The decision involves weighing the long-term benefits of ETFs against immediate, potentially significant tax burdens and their cascading effects on retirement costs. This dynamic suggests a structural impediment to asset migration from mutual funds to ETFs within the boomer demographic, despite the latter's perceived advantages.

Key Decisions for Investors

• Investors should carefully evaluate the capital gains tax implications of rebalancing long-held mutual funds in taxable brokerage accounts, as significant gains could trigger higher tax brackets and Medicare surcharges.
• For portfolios held in tax-advantaged accounts like 401(k)s or IRAs, consider transitioning to lower-cost, tax-efficient ETFs without immediate tax consequences.
• Assess the long-term benefits of ETF cost and tax efficiency against the immediate, potentially substantial tax burden of selling existing mutual fund positions, particularly for investors nearing or in retirement.