Baby Boomers Hold Back from ETFs Despite Popularity

Even though there’s a strong interest in exchange-traded funds (ETFs) among investors, baby boomers seem to be going against the grain, and there might be solid reasons for this.

According to recent research, just 6% of baby boomers—those born between 1948 and 1964—plan to “significantly increase” their ETF investments in the coming year. This contrasts sharply with 32% of millennials (born between 1981 and 1996) and 20% of Generation X (born between 1965 and 1980).

Furthermore, boomers are the least inclined to invest their entire portfolios in ETFs over the next five years. Only 15% express this willingness, as opposed to 66% of millennials and 42% of Gen Xers.

Schwab has been examining ETF investing for over a decade. In their 2025 report, they gathered insights from 2,000 investors, split evenly between those who engage with ETFs and those who do not, with 16% being boomers, 35% Gen Xers, and 43% millennials.

Other Observations on ETF Use

Interestingly, another report from the Investment Company Institute indicates that baby boomer households will represent the largest segment of mutual fund owners by 2024 at 35%. Generation X follows closely at 28%, with millennials at 25%.

There’s a sense of hesitation here. Baby boomers hold significant investments in mutual funds, and they likely have for many years. Dan Sotiroff, a senior analyst for passive strategies research, points out that while it may seem logical to swap mutual funds for comparable ETFs due to lower costs and tax benefits, rushing into that decision might not be wise.

He mentions, “On the surface, you might think you should make the switch. But digging a little deeper, that could be a costly move.”

What Makes ETFs Attractive?

ETFs gained popularity in the 2000s, providing a way to invest in a basket of underlying assets. While many mutual funds are actively managed, ETFs typically follow a passive strategy, tracking an index.

The main benefits of ETFs include lower costs, tax efficiency, and the ability to trade throughout the day. As of September 30, ETFs managed assets totaling $12.7 trillion, a rise from just $1 trillion at the end of 2010, according to Morningstar Direct.

In contrast, mutual funds hold even larger assets at $22 trillion, yet they are seeing more money leaving than entering. Up to September 30 this year, ETFs received inflows of $922.8 billion, while mutual funds faced outflows of $479.4 billion.

Capital Gains Impacting Boomers

Baby boomers, aged between 61 and 77, are increasingly using mutual funds for stock market investments. However, many may be holding onto funds they’ve owned for years, if not decades.

For those with mutual funds in a 401(k) or IRA, buying and selling ETFs isn’t taxable due to tax-deferred gains. But, if these mutual funds exist in a brokerage account, owners could face hefty capital gains taxes if they sell. For instance, if someone invested around $20,000 in a mutual fund that has appreciated to $70,000 or $80,000, selling could trigger a significant tax bill, according to Douglas Kobach, a certified financial planner.

Medicare Considerations

Beyond tax implications, those gains may also elevate retirees into a higher tax bracket, impacting their Medicare premiums. The income-related monthly adjustment amount (IRMAA) adds fees for higher-income individuals on top of standard premiums for Medicare coverage.

In 2025, IRMAA applies to incomes exceeding $106,000 for singles and $212,000 for married couples filing jointly, affecting the amount owed in premiums. The previous two years’ tax returns are factored in to assess IRMAA costs.

Moreover, it’s essential to recognize that when actively managed mutual funds transition into passively managed ETFs, their success relies on the underlying index’s performance. William Shafransky, a senior wealth advisor, emphasizes that this raises questions about whether a passive approach is necessary, or if active management fits better in light of economic conditions.