Show a baby boomer an exchange-traded fund (ETF) and they might be predisposed to scoff at such an investment vehicle and instead, tout the benefits of their tried-and-true mutual fund. On the flip side, show a millennial a mutual fund and they might be quick to boast of their ETF returns on the latest investing app.
Either way, it speaks to the contrast in generations as baby boomers grew up during the heyday of mutual funds in the 1970s and 1980s. By attaching themselves to these mutual funds for the long-term horizon, baby boomers would simply be stuck in their investments the same way they’re stuck in their ways.
“Part of my take on it is simply, they set their investments a long time ago, and now they’re on autopilot,” said Karen Schenone, ETF strategist at BlackRock iShares.
Fast forward to the financial crisis in 2008, which helped to spawn the popularity of ETFs that allowed investors to buy and trade baskets of stocks like individual securities. With the rise of ETFs the past decade, millennials grew up with them so in essence, ETFs weren’t their parents investments–it was something they could call their own.
So is it a simple case of embracing the newness of the still-nascent investment vehicle that has expanded exponentially since the Great Recession or is it other factors that are causing millennials to embrace ETFs? Here are three reasons.
Ease of Access
ETFs offer not just millennials, but investors in general ease of access since they trade like individual stocks during regular market hours. With the advent of mobile applications whether it’s a financial firm’s own proprietary trading platform like TD Ameritrade’s “ThinkorSwim” or an independent trading app like Robinhood, the ease of access on the go is an attractive option, particularly with millennials.
Furthermore, a number of mutual funds will require a minimum investment that can range from anywhere between $500 to $3,000 for the individual investor. An ETF investor doesn’t need access to war chests of capital in order to begin investing in ETFs–it will be largely dependent on the share price and how many shares of the ETF the investor wishes to own.
Low Cost
Add in the low price of entry with an average expense ratio of 0.44% for an ETF as opposed to mutual funds, which can range from 0.5 percent to 1 percent, and it makes for an ideal investment vehicle for millennials.
“Millennials are part of the Napster generation where things are generally free or very low cost,” said Ryan Marshall, certified financial planner at ELA Financial in Wykoff, N.J. “The conversations I have with my millennial clients generally all start with fees as their topic. Not how much money they should put away, not how their investments works, but what the cost is.”
Built-In Diversification
Not all investors have the time to perform copious amounts of research in order to build the ideal portfolio that can generate positive returns and at the same time, be bulletproof during a sharp market downturn. As such, the ability of an ETF to hold various stocks as opposed to being exposed to the risk associated with concentrating investment capital into one stock saves millennials time while reducing risk simultaneously.
“The bottom line is that this age group absolutely needs exposure to stocks in their investment portfolio, however it is important to manage both risk and costs which can take away from returns,” said Halpern Financial certified financial planner Melissa Sotudeh of Rockville, Maryland. “There is simply no reason to do it the hard way, since there are so many diversified ETFs available at low cost. Why not take advantage of them?”
For more information on ETFs, visit ETF Trends.