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Why baby boomers hold more mutual funds than ETFs
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Despite ongoing investor demand for exchange-traded funds, baby boomers appear to be bucking that trend, new research shows. Experts say there may be a good reason for it.
Only 6% of surveyed baby boomers — those born 1948-1964 — say they plan to “significantly increase” their ETF investments in the next year, according to a new study from Charles Schwab. That compares with 32% of millennials — those born 1981-1996 — and 20% of Generation X, born 1965-1980.
Boomers are also the generation least likely to say they are open to putting their entire portfolio in ETFs in the next five years, with 15%, versus 66% for millennials and 42% for Gen X.
Schwab’s research study into ETF investing has been ongoing for more than 10 years. In 2025, it collected responses from 2,000 investors: 1,000 who participate in ETFs and another 1,000 who don’t. From that sample, 16% were boomers, 35% were Gen X and 43% were millennials.
At the same time, baby boomer households were the largest share of mutual fund owners in 2024, at 35% according to a separate report from the Investment Company Institute. The next-largest mutual fund–owning household generations were Gen X, at 28%, and millennials, at 25%.
And therein lies the friction: Baby boomers own a lot of mutual funds — and probably have for a long time, said Dan Sotiroff, senior analyst on passive strategies research at Morningstar. While on the surface it would seem they should sell their mutual funds and buy comparable ETFs because they cost less and are tax efficient, experts say not so fast.
“On the surface, the answer is probably yes,” that they should switch their mutual fund assets to similar ETFs, Sotiroff said.
“But if you dig a little deeper, the answer might be no,” he said. That move may prove unexpectedly expensive.
Why investors favor ETFs
ETFs began gaining traction in the 2000s as a way to invest in a fund with a mix of underlying investments, similar to their cousin, mutual funds. While many mutual funds are actively managed — meaning professionals are at the helm picking the investments — most ETFs are passively managed because they track an index, and performance is based on that of the index.
Generally, the advantage with ETFs is their lower cost, 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.
While mutual funds’ assets are much higher at $22 trillion, more money is leaving them than going in.
This year through Sept. 30, mutual funds saw an outflow of $479.4 billion, compared with ETFs taking in $922.8 billion in new money, Morningstar data shows.
A ‘huge capital gain’ for long-term investors
Boomers, who range in age from 61 to 77 and were largely the generation that began using mutual funds in earnest to invest in the stock market, might be sitting on funds they’ve owned for years, if not decades.
If they’ve held those funds in a 401(k) or individual retirement account, selling and buying an ETF is not a taxable event because gains are tax-deferred and any withdrawals generally are taxed as ordinary income (or are tax-free in a Roth) in retirement.
But if those mutual funds are in a brokerage account — and have been for a long time — the owner may be sitting on significant capital gains, which are subject to taxation. That means a potential tax bill that has all kinds of repercussions if you’re among the older boomers.
“If you’ve put, say $20,000 into a mutual fund years ago and it’s now worth $70,000 or $80,000, if you go and sell, that’s a huge capital gain,” said certified financial planner Douglas Kobak, the principal and founder of Main Line Group Wealth Management in Park City, Utah.
Assuming you’ve owned the fund for more than a year, the growth would be taxed at a long-term capital gains tax rate of 0%, 15% or 20%, depending on your adjusted gross income. Otherwise, it’s taxed at ordinary income tax rates.
Gains could trigger Medicare surcharge
In addition to a potential tax bill, Kobak said, that gain may push the investor into a higher tax bracket, which comes with implications for retirees enrolled in Medicare.
Income-related monthly adjustment amounts, or IRMAAs as they’re called, are added to the standard premiums for Part B outpatient care coverage and Part D prescription drug coverage for enrollees with higher income.
In 2025, IRMAAs apply to incomes above $106,000 for single tax filers and $212,000 for married couples filing jointly. (Next year’s specifics have not been released yet.) The higher the tax bracket, the greater the surcharge amount. And, your tax return from two years earlier is used to determine whether you pay IRMAAs.
Additionally, if you would be selling an actively managed mutual fund for a passively managed ETF, remember that its performance will depend on that of the index it tracks, for better or worse.
“It’s really a question of, ‘Do I want that passive approach in [a particular] asset class relative to what’s going on in the economy around me, or am I better off in that active mutual fund?’” said CFP William Shafransky, a senior wealth advisor with Moneco Advisors in New Canaan, Connecticut.
