While ETFs are open to adults of any age to buy into them and profit from their use, they are perhaps most ideal for younger investors. Millennials in their 20s and 30s are often best placed to take advantage of them rather than older investors.
Here are 9 reasons why ETFs are best for investors in their 20s and 30s, instead of Gen X or “Boomer” investors.
1. More Easily Accepted Newer Investment Product
Most older investors didn’t start investing yesterday. Those in their 40s, 50s, or older began their investing “career” decades ago. Because of this, they largely chose to invest in mutual funds. Some may have dabbled in individual stocks, but typically the results for part-time investors with stock picking are poor. As a result, most moved to mutual funds where professional managers to do the stock-picking for them. Others were keener on index funds when Vanguard first introduced them and have stuck with that.
Younger people are adept at picking up new concepts and running with them. They may already be familiar with reliable Robo-investor options like Wealthsimple and similarly, might have come across exchange-traded funds Canada issued before too. They’re happy to learn about ETFs – follow the link to get the low-down – and aren’t fixed on a single way of investing. As a result, this opens up many more possibilities and potential extra investment profits too.
2. Faster Trading Options Preferred by Millennials
Having grown up with smartphones and laptops, younger people are used to clicking a few buttons and making things happen. Same-day or next-day delivery of goods is often seen as standard; older people remember when that wasn’t the case.
Similarly, being able to actively trade an ETF and completing the transaction in mere seconds hold an attraction for them. Compare this with the purchase of a mutual fund that will require days to complete and confirm it’s all down. Given the time delay, they’re unable to react when markets move unexpectedly leaving them stuck locking-in paper losses at least temporarily in a market decline.
Flexibility is highly regarded by people in their 20s and 30s compared to previous generations. ETFs are ideal to satisfy this need because they’re traded as a security in real-time on the market.
3. ETF Price Checking
While mutual funds may only update their net asset value (NAV) once a day, ETFs benefit from live trading throughout open market days. ETFs will indeed receive a NAV update quite often, but the trading aspects mean that young investors can see minute-to-minute price fluctuations following recent trades.
Not only that, but they can check pricing on their smartphone or through a brokerage app to verify the current valuation. This can be fed into a spreadsheet automatically if they’re technologically sophisticated enough to do so. Then their net worth and a planned date for financial freedom can be tracked as frequently as they wish.
Of course, it’s worth pointing out that watching investments this closely and frequently can have some downsides too. Certainly, it can lead to a short-term outlook that isn’t always for the best with investment portfolios.
4. ETFs Make Investing Seem More Accessible
The stodgy world of common stocks and mutual funds is something that their parents or grandparents may have talked about at the dinner table. But it also feels old-fashioned and stodgy. Because of this, it does little to encourage the younger generation to invest in the future.
By contrast, exchange-traded funds are relatively new. Sure, they’ve been around for decades, but they hadn’t become something that many investors were aware of until recently. It’s only since hundreds of ETFs were released and the expense ratios looked more attractive as the funds under management increased that younger people took notice.
5. Risk is More Manageable
Investing in the riskier side, such as leveraged or inverse funds, is possible with ETFs. It’s harder to do if you’re trying to manage it using a margin account at a brokerage because of the difficulty of handling potential surprising margin calls. Also, finding funds that used leverage either sensibly or predictably can be difficult to do too.
By buying into a 2X or 3X leveraged ETF, it’s possible to get higher rates of return than the index or market being tracked. The same can also be said for inverse ETFs too. Despite the obvious risks of buying into an ETF that magnifies either the gains or losses, it’s still far easier to manage than trying to get a margin account at a brokerage. And less daunting too.
So, from a risk management perspective, ETFs are safer and easier to handle. Live trading also means young investors can trade out of a position quickly to reduce the associated risks.
6. Achieve Good Diversification Sooner and Better
Many people in their 20s look at how to get diversification when they’re beginning. They struggle to achieve it because many investment funds have minimums like $5,000 or $10,000 to get started. The expense fees are also higher for smaller investments but may get reduced when having larger balances – all things that work against newer, young investors.
Trying to assemble a collection of funds to provide diversification by asset class, investing style, and investing provider becomes next to impossible. However, ETFs provide young people with a way to put together a list of interesting picks that will provide good diversification. They can then purchase several shares of each exchange-traded fund to give themselves instant diversification. There’s no need to wait around until they can afford to purchase 5 funds each with $5,000 minimums and sales loads to boot.
It’s just boom! And they’re done. And with much lower sums to start with. This provides Millennials with a way to get going sooner and to be better diversified at the outset, even without using a lifestyle fund or other balanced approach.
7. Demystifies Investing for Newbies
While ETFs are an investment product that needs to be well understood to pick the right ones, it can seem modern and less complicated than other choices. As such, it potentially demystifies investing and provides an accessible way into it.
It’s worth bearing in mind that Wall Street, bankers, and money, in general, is a confusing topic for many young people. The voluminous amount of information and overwhelming marketing they’re subjected to can create more confusion than clarity. Indeed, Bankrate.com recently found that many people in their 20s are keeping far larger cash balances on-hand than older generations. One of the reasons for this is the feeling that investing is “for other people”.
As single tradeable security, ETFs appear less complicated to millennials. This is certainly a good thing for the investing industry wanting to get the younger set to put money aside for their future.
8. Chase Trends Quickly and Get Out Fast
For Gen Z investors that like the idea of finding thematic ideas or short-term trends that are worth jumping on right away, then ETFs are perfectly positioned for this purpose. The wealth of ETFs available now let them dive into segments of industries, rather than one large industry such as technology or healthcare.
For instance, those interested in semiconductors can purchase an ETF specifically to bet on that. Or, they can look to buy into data center REITs where there’s now an ETF just for these types of publicly listed companies. When then the money is rung out of this sector or they feel it has peaked, they can sell out within seconds and move onto their next idea.
It provides the flexibility of stock trading with individual companies but with a little less risk in the process. A bet on a sub-sector is also easier to execute by purchasing shares of an ETF focused there than by purchasing shares in 5-10 companies to get sufficient diversification – it’s less expensive than way too.
9. Feeling More in Control
The flexibility of almost immediate trading and the vast array of different ETFs available including both actively managed and indexed varieties puts the power in the hands of young people.
More than ever, everyone wants independence, flexibility, and the ability to change their mind. ETFs offer the kind of fast-acting access and transparency that holds considerable appeal. Also, whilst many people of all ages look to use tax-efficient retirement plans to make their investment money go farther, not locking all their savings up in such vehicles is important too.
ETFs provide a greater feeling of control and better choices. Quick sales can lead to the choice to travel, relocate, or buy a home using the money from liquidated ETF shares to do as they wish.
ETFs are especially useful for people in their 20s and 30s who want to get started and build financial independence at a young age. At a time when many things are less certain than in years past, being able to change asset allocations effortlessly or sell investments to release cash for other purposes is particularly useful. Being a more modern investment option doesn’t hurt either.