Flash Pop | Digital Vision | Getty Images
Despite continued investor demand for exchange-traded funds, baby boomers appear to be bucking the trend, a new study finds. Experts say there may be good reasons for that.
According to a new study from Charles Schwab, only 6% of baby boomers surveyed (those born between 1948 and 1964) said they plan to “significantly increase” their ETF investments next year. This compares with 32% of Millennials born between 1981 and 1996 and 20% of Gen Xers born between 1965 and 1980.
Baby boomers are also the least likely generation to say they are willing to invest their entire portfolio in ETFs over the next five years, at 15%, compared to 66% of millennials and 42% of Gen Xers.
Schwab’s research on ETF investing has been ongoing for over 10 years. In 2025, we collected responses from 2,000 investors, 1,000 of whom will participate in the ETF and 1,000 who will not. Of this sample, 16% were Boomers, 35% were Gen Xers, and 43% were Millennials.
At the same time, another report from the Investment Company Institute found that baby boomer households will account for the largest share of mutual fund owners in 2024, at 35%. The next generation of households that own mutual funds are Gen X at 28% and Millennials at 25%.
And there is friction. Baby boomers own a lot of mutual funds, and likely do so for a long time, says Dan Sotiroff, senior analyst for passive strategies research at Morningstar. On the surface, it might seem like you should sell your mutual funds and buy comparable ETFs with lower costs and tax benefits, but experts say there’s no need to rush.
“On the surface, the answer is probably yes” to switch mutual fund assets into similar ETFs, Sotilov said.
“But if you dig a little deeper, the answer might be no,” he says. The move may prove unexpectedly costly.
Why investors like ETFs
ETFs, like their relatives mutual funds, began gaining traction in the 2000s as a way to invest in funds with a mix of underlying investments. While many mutual funds are actively managed, meaning that experts drive investment selection, most ETFs are passively managed because they track an index and their performance is based on the performance of the index.
In general, the advantages of ETFs are low costs, tax efficiency, and intraday tradability. As of Sept. 30, ETFs held $12.7 trillion in assets, up from $1 trillion at the end of 2010, according to Morningstar Direct.
Mutual funds have much larger assets at $22 trillion, but more money is flowing out than flowing in.
Through September 30 of this year, ETFs had inflows of $922.8 billion in new money, while mutual funds had outflows of $479.4 billion, according to Morningstar data.
“Huge capital gains” for long-term investors
Baby boomers, who range in age from 61 to 77, are the ones who are starting to use mutual funds in earnest, primarily to invest in the stock market, but they may be leaving behind funds they’ve held for years, if not decades.
If you hold these funds in a 401(k) or individual retirement account, buying and selling ETFs is not taxable. That’s because profits are tax deferred and withdrawals are typically taxed as ordinary income in retirement (or tax-free with a Roth).
However, if those mutual funds are in a brokerage account and have been there for a long time, the owner may have significant taxable capital gains. If you’re an older boomer, this means a tax bill that can have all sorts of ramifications.
“If you invested, say, $20,000 in a mutual fund years ago and it’s now worth $70,000 or $80,000, if you go to sell it, that’s a big capital gain,” says Douglas Kobach, a certified financial planner and president and founder of Mainline Group Wealth Management in Park City, Utah.
Assuming you own the fund for more than one year, growth will be taxed at long-term capital gains tax rates of 0%, 15%, or 20%, depending on your adjusted gross income. Otherwise, it will be taxed at your ordinary income tax rate.
Benefits may result in Medicare surcharges.
In addition to the potential tax bill, Kobach said gains could push investors into a higher tax bracket, which affects retirees on Medicare.
The Income-Related Monthly Adjustment Amount (referred to as IRMAA) is added to standard premiums for Part B outpatient medical coverage and Part D prescription drug coverage for high-income enrollees.
In 2025, IRMAA applies to incomes above $106,000 for single taxpayers and $212,000 for married couples filing jointly. (Details for next year have not yet been announced.) The higher the tax, the larger the surcharge. Your tax return from two years ago is then used to determine whether to pay IRMAA.
Additionally, keep in mind that when actively managed mutual funds are sold as passively managed ETFs, their performance, for better or worse, depends on the performance of the index they track.
“It’s really a question of, ‘Given what’s going on in the surrounding economy, should I take a passive approach in[a particular]asset class, or should I do an active mutual fund?'” said William Shafransky, CFP, senior wealth advisor at Moneco Advisors in New Canaan, Conn.
