Even though many millennials have been generally bad at saving and investing so far, something they have been good at is choosing investment options that make sense.
At this point, I’m sure most of you have heard the term ETF. ETF stands for Exchange Traded Fund and is an investment vehicle that tracks an index, a commodity, or bonds.
ETFs have exploded in popularity as tech startups such as Acorns, Wealthfront, and Motif Investing have targeted millennials to strategically invest in ETFs.
So what makes these funds so sexy for millennials?
- ETFs are easy and cheap. Easy to purchase as there typically no minimums required to invest, and cheap to purchase and cheap to hold. One of the most attractive parts of ETFs are the low fees compared to other investment vehicles such as mutual funds. Mutual funds tend to have much higher fees that can add up to hundreds of thousands of dollars over a life time.
- ETFs trade like stock. This means that prices of ETFs change throughout the day. What this also means is that you can sell your shares anytime so you maintain liquidity.
- Shareholders (you) of an ETF don’t actually own the investments that are within the ETF itself. For example, you own some shares of the Vanguard Growth ETF which holds Apple as one of it’s investments. Even though you own the fund, you don’t own Apple itself.
- The main difference between a mutual fund and an ETF is that a mutual fund is an actively managed investment vehicle, whereas an ETF is a passively managed investment vehicle. What does that mean? ETFs typically track a market index while mutual funds actively buy and sell investments within the fund as market conditions change.
- How do individual ETF investors make money? Shareholders of an ETF make money through the fund’s performance. The fund’s performance is dependent on how well the underlying securities do. Proportionate profits are paid out in the form of dividends or interest.
- As stated above, ETF’s are extremely popular with millennials. Just how popular? According to Chris Concannon, CEO of Bats Global Markets, 40% of millennials are invested in ETFs!
- ETFs don’t provide a guaranteed return. Though a lot of ETFs are considered to be some of the safer options for investing, there are no ETFs that promise a certain return and you always have the chance of loss.
- Taxes on ETFs are similar to taxes on stock. You don’t get taxed until you sell your shares. This differs from taxes on mutual funds as you are liable for capital gains taxes every year in a non-retirement account.
- How do I get started? As mentioned above, there are several tech startups that are disrupting the investment industry by providing easy and thoughtless ways to invest. Acorns is a startup that rounds your every purchases to the nearest dollar and invests the difference into low-cost ETFs. Wealthfront is another startup that offers a way to save for retirement using the best technology without the high fees.
It’s important to educate yourself additionally on the different types of ETFs and how you can take advantage of compounding your savings through investing!