Millennials: The Etf Generation?

Millennials, born between the early 1980s and late 1990s, are investing in ETFs at high rates. They are the most likely generational group to have exchange-traded funds in their retirement accounts, at 81% according to a Nasdaq report. This is due to the lower costs, tax benefits, and accessibility compared to mutual funds. ETFs are an attractive investment vehicle for millennials as they are easier to buy and sell directly from a brokerage account, and they have lower associated fees. This generation now spends $600 billion a year, and that figure is rising as they approach their prime earning years.

Millennials and ETFs: a match made in heaven?

Millennials, born between the early 1980s and late 1990s, are the first generation to grow up with mobile phones, the internet, and social media. They have experienced a high level of prosperity and few economic crises. As millennials enter their prime earning years, their spending habits are reshaping the US economy, with the generation now spending $600 billion a year. This shift in consumer spending presents an attractive investment opportunity.

Millennials are increasingly investing in exchange-traded funds (ETFs). According to a Nasdaq report, 81% of millennials have ETFs in their retirement accounts, making them the most likely generational group to do so. This trend has been growing over the past three years. The popularity of ETFs among millennials can be attributed to several factors, including lower costs, tax benefits, and accessibility compared to mutual funds.

ETFs offer a broad range of investment opportunities with lower fees, making them an attractive option for young investors starting their portfolios. For example, the SPDR S&P 500 ETF provides exposure to the 500 largest US-based stocks with management fees of less than $1 annually for every $1,000 invested. Another example is the iShares Core S&P US Growth ETF, which focuses on fast-growing companies like Apple while charging just 50 cents annually per $1,000 invested.

Additionally, ETFs provide an easy way to invest in companies that align with millennials' values. For instance, the iShares MSCI KLD 400 Social ETF tracks 400 US-based companies that have been screened for positive environmental, social, and governance characteristics. This fund excludes corporations involved in weapons, tobacco, and alcohol.

The growing popularity of ETFs among millennials is also reflected in the increasing number of ETFs tailored specifically to this demographic, such as the Global X Millennial Consumer ETF (MILN). This ETF seeks to invest in companies that are likely to benefit from the rising spending power and unique preferences of US millennials. These companies span various categories, including social media, entertainment, food and dining, clothing, health and fitness, travel, education, housing, and financial services.

In conclusion, the combination of millennials' increasing spending power and the advantages offered by ETFs makes this an attractive investment strategy. The availability of ETFs that cater specifically to this demographic further contributes to the appeal of ETFs for millennials. However, it is essential to conduct thorough research and consider various factors when choosing an ETF, such as the underlying index methodology, performance, size, cost, age, income, domicile, and replication method.

The pros and cons of ETFs for millennials

Millennials or Generation Y are the terms used to describe the generation born between the early 1980s and the late 1990s or 2000. Millennials are the most likely generational group to have exchange-traded funds (ETFs) in their retirement accounts, at 81% according to a report by Nasdaq.

Pros

• Lower costs and fees: ETFs have lower associated costs, tax benefits and accessibility compared to mutual funds. Index ETFs have a 0.44% average annual fee, half the 0.88% fee for index mutual funds, and active ETFs carry a 0.63% average fee, versus 1.02% for actively managed mutual funds.
• Tax efficiency: ETFs do not usually trigger capital gains taxes.
• Transparency: The majority of ETFs disclose their holdings or what's held in their portfolio.
• Broad opportunities: ETFs give young investors broad opportunities with lower fees.
• Less analysis: You don't need to dive into the analysis of a single company to get ahead.

Cons

• Risk: As with any investment, there is a risk of loss.
• Wash sale rules: Be mindful of IRS guidelines that block you from writing off a loss if you repurchase the same or an identical security within a 30-day window before or after the sale.

How to choose the right ETF

Millennials and Gen Zers are increasingly investing in exchange-traded funds (ETFs), with 81% and 75% of each group, respectively, holding ETFs in their retirement accounts. With over 8,000 ETFs available, choosing the right one can be a daunting task. Here are some tips to help you select the right ETF for your investment goals:

Define your investment goals and risk tolerance:

Before choosing an ETF, it is essential to understand your financial objectives and risk appetite. Are you building a nest egg for retirement, buying a home, or investing for the long or short term? Defining your goals will help you tailor your ETF choices accordingly. For example, if you have long-term goals, you may consider stock ETFs, while short-term goals might lead you towards fixed-income ETFs or bonds.

Choose the right type of ETF:

ETFs can be categorised into types such as equity, fixed income, commodities, and currency. Equity ETFs track the performance of a particular stock market index or sector, while fixed-income ETFs are composed of government bonds and corporate debt. Consider which type aligns with your financial goals and risk tolerance.

Evaluate the fund's performance and fees:

When selecting an ETF, research its historical performance and associated fees. The primary fee to consider is the expense ratio, which is typically shown as a percentage of your investment. While fees might seem negligible, they can add up over time and eat into your returns. So, choosing a cost-effective ETF can be beneficial.

Consider the fund size:

Larger funds tend to benefit from economies of scale, which can lead to lower fees for investors. Additionally, larger funds often have better liquidity, resulting in lower spreads when buying or selling.

Understand the fund structure:

There are two main types of ETF structures: physically replicated ETFs and synthetically replicated ETFs. Physically replicated ETFs use assets to track their index, providing more transparency and generally considered less risky. On the other hand, synthetically replicated ETFs use derivatives, which might be more suitable for certain markets where physical replication is inefficient or impossible.

Research the fund manager:

ETFs are managed by asset management companies, and it is crucial to evaluate their strategies and performance track records. Consider their expertise, specialisations, and risk management philosophies to ensure they align with your investment goals and comfort level.

Understand the tax implications:

Depending on your location, ETF investments might have tax implications. For example, in the UK, ETFs domiciled outside the country are treated as offshore investments, and gains are taxed as income. In contrast, some offshore ETFs have UK Reporting Status, allowing capital gains to be taxed at a flat rate.

In summary, choosing the right ETF involves a combination of defining your investment goals, understanding the different types of ETFs, evaluating fees and performance, and considering practical factors such as fund size, structure, and tax status. By following these steps, you can make more informed decisions when selecting ETFs that align with your financial objectives and risk tolerance.

The future of the ETF market

Millennials and their spending habits are reshaping the US economy, and this generation is increasingly investing in exchange-traded funds (ETFs). As the largest generation in the US, making up over 45% of the US workforce, companies that cater to millennials could be well-positioned for growth.

Millennials are the generation born between the early 1980s and the early 2000s. They are the first generation to have grown up with mobile phones, the internet, and social media, and they have experienced a high level of prosperity and few economic crises. As millennials enter their prime earning years, their spending is expected to increase, and this will impact the economy.

Millennials are investing in ETFs at high rates, with 42% of millennials investing in ETFs, according to a BlackRock survey. This is a significant increase from 33% the previous year. Millennials are attracted to ETFs because of their lower costs, tax benefits, and accessibility compared to mutual funds. ETFs also offer broad opportunities with lower fees, making them an attractive option for young investors starting their portfolios.

• Continued growth in ETF investing: The trend of millennials investing in ETFs is expected to continue, with more millennials incorporating ETFs into their retirement accounts. According to Nasdaq's annual report, millennials are the most likely generational group to have ETF holdings in their retirement accounts, at 81%. This trend has been growing over the past three years and is not expected to slow down, according to Alison Hennessy, head of exchange-traded product listings at Nasdaq.
• Lower costs and tax benefits: ETFs offer lower fees compared to mutual funds and other index funds. Index ETFs have an average annual fee of 0.44%, while active ETFs have an average fee of 0.63%. Additionally, ETFs do not typically trigger capital gains taxes, making them tax-efficient for younger investors.
• Accessibility and ease of trading: ETFs are easier to buy and sell directly on a brokerage account compared to mutual funds. As active investors, millennials have the ability to make intra-day trades with ETFs, which is not possible with mutual funds.
• Broad investment opportunities: ETFs offer young investors a diverse range of investment options across various sectors and industries. Millennials can invest in ETFs that align with their values, such as funds focusing on environmental, social, and governance (ESG) issues.
• Long-term investing: Millennials are thinking long-term when it comes to ETF investing. According to the BlackRock survey, one-third of investors plan to increase their use of ETFs for long-term investing, with the average holding period increasing to nearly six years.

In conclusion, the future of the ETF market looks positive, with millennials driving the growth and shaping the landscape of investing. As millennials continue to invest in ETFs and their spending power increases, the ETF market is expected to expand and evolve to meet their needs and preferences.

Top ETFs for millennials

Millennials are increasingly investing in exchange-traded funds (ETFs), with 81% of millennials having ETFs in their retirement accounts, according to a report by Nasdaq. This is due to the lower costs, tax benefits, and accessibility of ETFs compared to mutual funds. Here are some of the top ETFs for millennials:

SPDR S&P 500 ETF (VOO)

Warren Buffett has advised people to put their money in a low-cost fund benchmarked to the S&P 500. This SPDR fund is a great way to do that, giving you exposure to the 500 largest U.S.-based stocks with management fees of less than $1 annually on every $1,000 you invest.

IShares Core S&P U.S. Growth ETF (IUSG)

This iShares fund is a bit more aggressive, focusing on fast-growing companies like Apple while overlooking slower-growth companies like Procter & Gamble Co. It's still a low-cost index fund, however, benchmarked to the S&P 900 Growth Index and charging just 50 cents annually on every $1,000 invested.

WisdomTree U.S. Total Dividend Fund (DTD)

This WisdomTree dividend fund is a good option for those who are unnerved by the notion of a wild ride in the stock market. It focuses on U.S. stocks that pay higher-than-average dividends, providing a steady stream of income plus the potential for share appreciation. The fund currently yields almost 2.7%, and charges $2.80 in annual fees on every $1,000 invested.

First Trust Dorsey Wright Focus 5 ETF (FV)

The FV fund is a "fund of funds" that provides exposure to five very different ETFs, including a bank sector fund and a broad-based Nasdaq 100. This ETF offers broader exposure across more corners of the market, with expenses of $3 annually on every $1,000 invested.

Vanguard Total World Stock ETF (VT)

This Vanguard fund provides true diversification by stretching beyond the United States to include all markets, including Europe and Asia. Top holdings include familiar names like Apple and Microsoft, as well as China tech giant Tencent Holdings.

IShares MSCI KLD 400 Social ETF (DSI)

This iShares ETF is for investors who want to put their money behind companies that share their beliefs and values. This broad-based fund tracks 400 U.S.-based companies that have been screened for positive environmental, social, and governance characteristics. The fund excludes corporations involved in weapons, tobacco, and alcohol.

PowerShares Dynamic Leisure & Entertainment (PEJ)

Millennials spend a significant amount on entertainment, and this exchange-traded fund includes a host of restaurants as top holdings, such as Olive Garden parent Darden Restaurants and Chipotle Mexican Grill.

The Organics ETF (ORG)

The Organics ETF is a good fit for millennials who tend to consume fresh, organic options instead of processed foods. Top holdings include U.S. names like Sprouts Farmers Market, as well as more obscure players like French beauty company L'Occitane International.

GlobalX Autonomous & Electric Vehicles ETF (DRIV)

This Global X fund is a great way to invest in the trend towards electric vehicles and autonomous vehicle technologies. It includes automakers like Tesla, as well as tech stocks like Microsoft and chipmaker Nvidia Corp.

Invesco WilderHill Clean Energy ETF (PBW)

With a recent Gallup poll showing that 70% of Americans ages 18 to 34 are worried about climate change, this Invesco clean energy ETF is a great way to invest in companies fueling the shift to a greener economy.

First Trust Dow Jones Internet Index (FDN)

As natives to the internet, millennials have played a crucial role in the growth of e-commerce. This First Trust ETF provides broad exposure to e-commerce across its 40 holdings, including Amazon, Expedia Group, and Verisign.

Frequently asked questions