“Income investing is no longer only a retiree conversation” - BlackRock

Boomers, you may be delighted to know that younger Australians finally agree with you on something: income investing rocks.

A new report from BlackRock-owned iShares found that 37% of investors are using ETFs specifically for income. And it’s not just about funding retirement. Australians in their 30s and 40s are increasingly looking to generate extra cash from their portfolios while they’re still working.

“Income investing is no longer only a retiree conversation,” says Lydia Vitalis, Investment Strategist at BlackRock Australia.

I took the opportunity to speak to Vitalis about what’s driving the shift.

We also unpacked why Australians are using ETFs, what’s holding some investors back, where they plan to put their money next, and the three distinct investor personalities that emerged from the survey of more than 3,000 Australian adults.

ETFs for extra income

Australians aged 25–44 are the most likely to say they are actively looking to generate income outside work, often driven by goals such as keeping up with the cost of living or achieving FIRE (financial independence, retire early).

These are the two biggest motivations driving younger Australians towards income investing, and it’s not hard to see why. Buying a home remains hugely unaffordable for many, while inflation has outpaced wage growth by around 0.5% a year since 2020.

Against that backdrop, it’s interesting to see evidence that ETFs are helping some investors bridge the gap, and Vitalis helped shed some light on how investors are doing this, given iShares is one of Australia’s biggest ETF issuers.

“We found that these respondents use active ETFs and equity income ETFs more than the broader survey cohort,” she says.

“Outside of ETFs, these respondents also use managed funds more than the broader survey group – so they do appear to be using targeted products designed specifically for the purpose of generating income.”

That appetite is also showing up in where the money is flowing. Vitalis points to strong inflows into the iShares Enhanced Cash ETF (ASX: ISEC) and iShares Core Composite Bond ETF (ASX: IAF), as investors look for a combination of yield, diversification and liquidity in a more uncertain market environment.

Investment intentions over the next 12 months

While one cohort of investors are making an intentional choice to build a compounding income machine with income ETFs, another is finding it hard to transition their money from bank accounts and into markets.

The iShares report found 62% of respondents had money sitting in savings accounts, compared to 14% for term deposits and 16% for ETFs - but it’s what they plan to do next that’s interesting.

Over the next 12 months, 42% of respondents plan to lock in a term deposit, while 32% intend to invest in ETFs. This one was fascinating, because it highlights that Australians seem more interested in chasing higher deposit rates relative to building markets exposure.

Vitalis says the fact that cash rates are rising are one part of the story, but another is a set of barriers including making smart choices and concerns about losses, as shown below.

“Cash has an important role in providing liquidity, meeting near-term spending needs and, for SMSF investors, supporting pension payments or other portfolio cash-flow requirements,” Vitalis says.

For money that is genuinely long term, however, staying entirely in cash can create its own risk, she argues, particularly if interest rates fall and investors face reinvestment risk, or if inflation erodes purchasing power over time. This is why investors should keep their eye on total returns and not just the yield.

Vitalis suggests investors can make the transition gradually, starting with simple, diversified ETFs that match their investment horizon and risk tolerance, before considering more targeted exposures for specific goals such as income or growth.

Ultimately, she says, it shouldn’t be viewed as an all-or-nothing choice between cash and markets:

“The key is not cash versus markets as an all-or-nothing decision, but making sure each part of the portfolio has a clear job: liquidity for short-term needs, and growth, income or diversification for longer-term goals.”

3 types of ETF investors

The report also identified three broad types of ETF investors, based on where they are in their investing journey:

• The Portfolio Builders: 45% invest in ETFs for diversification.
• The Regular Investors: 31% value being able to invest small amounts regularly.
• The Investment Starters: 35% see ETFs as a good way to get started investing.

Vitalis says these aren't necessarily three distinct tribes, but rather stages investors can move through as they become more experienced.

Portfolio Builders are the most deliberate, using ETFs across their portfolios to balance growth, income and diversification.

Regular Investors have turned investing into a habit, steadily building their portfolios through regular contributions or dollar-cost averaging.

And Investment Starters are just that: investors taking their first steps, with simplicity, education and diversified exposures helping them build confidence along the way.

"What’s encouraging to see is that each group is aiming to invest with more confidence and intention - whether that means getting started, investing more consistently, or building a more considered portfolio over time."