Gen Z and Millennials buck housing trend, build wealth through global investing

You don’t have to look around too hard to see claims of generational conflict and unequal wealth.

A recent headline in The Age which said: “Boomers splurge on dining, travel as young people cut back on essentials” is typical of the narrative – older Australians are cast in a negative light for living large while younger Australians are portrayed as being locked out of the housing market and left at the mercy of rapacious landlords, unable to save or invest.

The only problem with that narrative – other than the nasty stereotypes it produces – is that it is only half of the story.

While it is true that many younger Australians are finding it difficult to invest in real estate due to high relative prices compared to income levels, it is also true that they are still very enthusiastic investors who are using technology to spread their wings around the world.

Younger generations enthusiastic offshore investors

They have also been incredibly successful, with Gen Z and Millennial portfolios growing quickly due to a strong emphasis on the US share market in particular.

One estimate found that US and global shares could account for a combined 70% of Gen Z and Millennial portfolios, with just 30 per cent allocated to Australian shares – probably the absolute opposite of the asset allocation for many older Australian investors.

It is not hard to see why such an approach is working so well, with the tech heavy Nasdaq Composite index up 107% over five years compared to 81% for the S&P500 and just 28% for the ASX200.

Using figures for the Pearler investing app, US asset exposure has increased by 138% in the two years to March 2024 to account for 50% of total asset exposures – a big jump from just 21% in 2022.

Locally listed ETFs provide for easy offshore investing

Much of the US exposure is provided by passive index ETFs that track the US indices but there is also a lot of direct US share exposure, particularly to fast-growing US technology companies.

While it is true that access to buying housing has become more difficult, it could also be true that younger generations are building their wealth – and potentially a housing deposit – through more efficient and faster growing means such as international ETFs.

Returns are often higher than property

The returns on international and local equities are at least as good and possibly much better than those of property and there is no need to pay a range of prohibitive costs such as stamp duty, a massive deposit and very high interest costs.

The total value of Australian exchange-traded funds is now around the $200 billion mark, with an amazing $2.65 billion flowing into ASX-listed international equity ETFs over the three months to the end of March 31.

That is more money than flowed into the same segment over the whole of last year, so it adds some more evidence about the size of the shift toward international investment – much of it coming from highly informed younger investors.

Money flooding to US markets

Some data released by the ASX and Vanguard showed that inflows into international equity ETFs accounted for half of total inflows into the Australian ETF industry over the first quarter, with Australian equity ETFs attracting a little under $1.5 billion or 28% of investor capital.

These investment trends are worth keeping in mind to get a more nuanced view on the extent of generational inequality and wealth, which until now seems to have been measured purely in the dimension of purchasing property.

Younger generations are more internationally and domestically mobile and the lack of a long-term mortgage may not just be a measurement of affordability but also in some cases of flexibility and an embrace of the new opportunities for international investment that have opened up.