As investors have poured increasing amounts of money into ETFs in recent years, millennials have taken note. Low fees and instant diversification are just a couple of key attributes that have drawn in millennial investors to ETFs.
Tax advantages and social considerations have also been among the selling points to young investors. While millennials may be perceived by some to be a fickle bunch, it is apparent that the trend of utilizing ETFs to achieve their investment objectives is unlikely to fade anytime soon.
A BlackRock survey from September 2016 revealed that 70 percent of millennials were likely to allocate new investments to ETFs in the next year. And 56 percent of millennials described ETFs as their investment vehicle of choice as part of a Charles Schwab & Co. survey conducted in June.
One asset manager has seen millennials embrace ETFs due in part to relatively low operating expenses. “They are constantly being told to focus on low-cost indexing,” said Jason Browne, chief investment officer of FundX Investment Group. “Millennials have grown up in an era where there has been some mistrust in the markets and some big bear markets. Large-cap indexes have been tough to beat over the past eight years so low-cost indexing has been attractive. It certainly has put a real tailwind behind ETFs as an investment option.”
Browne is a portfolio manager of $219 million FundX Upgrader Fund (FUNDX), a mutual fund that invests in a portfolio of equity mutual funds and ETFs. “ETFs offer millennial investors the benefits of low-cost, transparency and broad-based exposure,” he said. “We have been using ETFs for almost 20 years now. They give us a lot of flexibility, including using options strategies to hedge around positions in a mutual fund.”
IShares Edge MSCI USA Momentum Factor ETF (MTUM) and Vanguard FTSE Europe ETF (VGK) were the top ETF holdings of FundX Upgrader as of Aug. 31. The ETFs have returned 21.6 percent and 19.9 percent year-to-date.
Investing In Sustainability
Adapting to varying appetites for involvement in managing their investments has been vital to Browne in reaching millennials. “We publish a newsletter for those that want to do their own investing,” he said. “We also offer our own mutual funds where we are implementing our strategies at different risk levels. Having a lot of different ways to decide the level of advice they want, how they want to pay for it and still have access to the same strategy regardless of the path they take is something millennials are pretty fond of.”
Browne has observed an emphasis on sustainability among millennial investors in recent years. “For a long time, if you wanted to align your investments with your values, you had a narrow universe of funds to choose from,” he said. “There are now hundreds of funds that have some form of environmental, social or governance-related aspect. There are also many service providers that provide insight into portfolios and ETFs and rate them based on different measures of sustainability.”
Tax And Diversification Benefits
Tax efficiency and diversification are additional benefits for millennial investors to consider in allocating to ETFs. “ETF investors don’t get hit with the same hidden capital gains taxes mutual fund managers pass along to their shareholders,” said Kevin Miller, portfolio manager of the E-Valuator Funds. “ETFs are a great diversification tool for millennials that many generations of investors did not have available previously. The ETF industry continues to grow and I see it being a vital part of millennials’ portfolio composition not only today, but for years to come.”
Miller utilizes his proprietary E-Valuator analytical software to select and monitor the ETFs and mutual funds that make up the underlying holdings of the mutual funds he manages. “We have six mutual funds that are a fund-of-funds approach that invest in ETFs and institutional class shares. We feel fortunate that our mutual funds have been performing very well relative to their Morningstar peer groups,” he said. “The success of our mutual funds validates the software we are using. It has worked very well for not only millennials, but anyone who wants to invest in mutual funds or ETFs.”
A Blended Approach
Millennials may not want to rely solely on ETFs in constructing their portfolios. “We are coming off a period from 2009 to 2014 that included three rounds of quantitative easing that was very supportive of passive management,” Miller said. “So, if a millennial is just entering the investment world and looks at the three and five-year track records of funds, they’ll see that passively managed funds with very low costs did really well during that period. I fear the recent 3-year and 5-year performance may overly influence their allocation decisions. Millennials will definitely utilize passively managed investments, such as index funds and ETFs, but I hope they don’t completely ignore what active management can do for them during periods of market turbulence and uncertainty.”
Miller sees millennial investors who incorporate both passive and active management strategies as being in the best position to achieve optimal long-term results.
“We look at passively managed funds as a way of capturing the market,” he said. “If we are looking at our large-cap domestic allocation, we might decide to put some of that allocation into SPDR S&P 500 ETF (SPY), but then take a component of that allocation and dedicate it to an active manager to drive alpha while seeking to generate superior performance in more turbulent times.”
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