ETFs are taking over portfolios. What it means for markets and investors

SCHW

Investors are warming up to exchange-traded funds, so much so that many fundholders say they’re on the way to portfolios 100% loaded with ETFs.

That’s the takeaway from a new Schwab Asset Management study that concludes 62% of ETF investors “envision putting their entire investment portfolios into ETFs, with 50% saying they could be fully invested in ETFs in the next five years.”

That could be a leading-edge issue on the consumer investment front, as 66% of ETF investors included in Schwab Asset Management’s survey say they started investing in ETFs within the past five years. Most also say they’re drawn to ETFs for their low costs and ease of access, Schwab added.

ETFs' ascent could come at the expense of individual stocks

While nobody is saying ETFs will eliminate stocks, a market scenario in which investors shift to ETF-only portfolios would give Wall Street a vastly different look, at least among investors who represent the financial markets’ future.

“I absolutely believe the results of this study, particularly for younger investors,” said Asher Rogovy, chief investment officer at Magnifina, LLC in New York City.

Rogovy said he’s met many investors who think that individual stock investing involves catching a meme stock or picking the next NVDA. “These are games that many investors don't want to play,” he noted. “Few understand that good investing can mean picking 20-30 individual stocks that will simply perform better than average, or provide more stability.”

That’s just for starters. Market mavens point to multiple reasons why investors, especially the under 40-set, are turning to funds over individual stocks.

They view the risk factor as lower with funds

In a chaotic economic and political environment, many investors view the stock market as highly risky. “A lot of investors are fearful,” Rogovy noted. “We hear countless stories about single stock crashes and people losing too much with a risky bet; in movies, on Reddit, on social media, and the news.”

What investors rarely see are stories of successful, diligent long-term investing. “Warren Buffett is an exception, and his approach is often held up as an example of the right way to invest in stocks,” Rogovy added. “While he’s generous in sharing his knowledge, Buffett’s advice is for novice investors to use index funds.”

ETFs take less time

On Main Street, just like Wall Street, time is a commodity, and the sooner regular investors can arrive at a portfolio decision, the better.

“In today’s world, time is probably the one commodity working people view as in short supply,” said Max Linnginton, co-founder at EPSMomentum, a New York City-based stock market analytics company. “Individual security selection takes a considerable amount of time and expertise.”

That reality often leads regular investors to financial media, publications, and AI, which can elevate everyone’s knowledge.

“Even so, relying upon your favorite pundit, finfluencer, or AI LLM can lead to some questionable results,” Linnginton said. “As a result, the use of ETFs can replace the need for a finance degree, spread the risk of holding individual stocks, and provide today’s investors with a good level of confidence. After all, who wants to store gold bars if exposure to the commodity can be acquired through an ETF?”

No lack of options

Generally, when describing the essence of ETFs, stock market experts agree with the “low-cost building blocks and a flexible entry point” idea.

“In recent years, it’s unquestionable that ETFs have grown to the scale of a separate, self-contained investment mechanism,” said Arthur Azizov, founder and investor at Dubai-based B2 Ventures. “There are thousands of ETFs listed on Nasdaq."

ETFs don't just allow Main Street investors to gain exposure to any investment idea quickly. “They also let us short individual sectors, regional markets, and leverage our favorite stories to double down on what we believe in, knowingly or religiously,” Azizov said. “Moreover, they can offer the following trade signals of great investors like Warren Buffett or Cathie Wood.”

Going ETF-only has its risks

Market experts say it’s possible, yet realistically unlikely, that investors will end up in an ETF-only world.

“Should it hypothetically become reality, the impact on market structure would be immense,” Linnginton said, and he lays out multiple potential outcomes.

• The disappearance of individual stock investing likely leads to the larger-cap companies getting an even greater share of capital allocation.

• Smaller companies would find capital raising harder, “and the vital service traditional investment banks provide in the form of small company research would disappear,” Linnginton noted.

• Additionally, the incentives for early-stage investors, venture capital firms, and the entrepreneurs running tomorrow’s IPOs would potentially dry up.

Overall, an ETF and the ever-evolving industry have unquestionably experienced tremendous growth, but that likely isn’t enough for what investors really need.

“Single-stock investing has its attractions in terms of risk and reward, investor empowerment, choice, sentimentality, the thrill of ownership, and many other reasons that appeal to the different types of investors,” Linnington added.

If you go the ETF-only route

Investors who opt for an ETF-only portfolio still need to do their own research and maintain a balanced investment experience.

“Know what’s inside the bundle,” Azizov said. “Some ETFs are heavy on a few tech giants; others spread the risk more evenly; and the third group would provide an integrated hedge which protects the downside but limits the upside.”

That means checking the fine points before making the big jump into ETFs.

“If it suits your strategy, go with a mix of broad market funds with sector or thematic plays, but don’t chase every shiny new launch,” Azizov noted.

It’s also worth remembering that ETFs are not the whole story, as bonds, FX, crypto, cash, and alternatives still matter. “Still, seeking exposure to them via relevant ETFs might be an option,” he added. “In any case, diversification across asset classes is the only real safety net.”

Not so long ago, ETFs launched as investment building blocks, and now they’re turning into the all-inclusive asset class. “Even though the ETF-only might be a bit of hype, one thing is clear: Investors are leaning hard into the ETF story, and the market will have to adjust to this growing popular theme,” Azizov said.