Here we elucidate the effect of Alzheimer disease (AD)-predisposing genetic backgrounds, APOE4, PSEN1ΔE9, and APPswe, on functionality of human microglia-like cells (iMGLs). We present a physiologically relevant high-yield protocol for producing iMGLs from induced pluripotent stem cells. Differentiation is directed with small molecules through primitive erythromyeloid progenitors to re-create microglial ontogeny from yolk sac. The iMGLs express microglial signature genes and respond to ADP with intracellular Ca2+ release distinguishing them from macrophages. Using 16 iPSC lines from healthy donors, AD patients and isogenic controls, we reveal that the APOE4 genotype has a profound impact on several aspects of microglial functionality, whereas PSEN1ΔE9 and APPswe mutations trigger minor alterations. The APOE4 genotype impairs phagocytosis, migration, and metabolic activity of iMGLs but exacerbates their cytokine secretion. This indicates that APOE4 iMGLs are fundamentally unable to mount normal microglial functionality in AD.