The College Investor

Millennial Personal Finance and Investing Blog

  • Facebook
  • Instagram
  • Twitter
  • YouTube
  • About
  • Products
  • Free Tools
  • Contact
  • Escape Student Loan Debt
  • Start Investing
  • How To Earn More Money
  • Save More Money
  • Forum
Home » Investing » ETF » ETFs: The Millennial Investor’s Secret Weapon

ETFs: The Millennial Investor’s Secret Weapon

Last Updated On September 30, 2019 Robert Farrington 2 Comments

This article contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. For an explanation of our Advertising Policy, visit this page.

If you're a millennial investor ETFs can be your best friend. Here's what you need to know and how to use them.

If you're a millennial investor ETFs can be your best friend. Here's what you need to know and how to use them.Millennials are notoriously cautious when it comes to investing and to say they don’t trust the market is putting it lightly. A 2014 study from State Street found that 40% of millennials prefer cash investments to trying their luck with stocks or pricey mutual funds.

While cash is low-risk, it’s also low return. Exchange-traded funds or ETFs are a good option for bridging the gap. For millennials who want to invest in the stock market without getting burned, ETFs can be a valuable tool for building wealth.

How ETFs work

Exchange-traded funds fuse elements of stocks and mutual funds into one security. Like a mutual fund, an ETF can hold different kinds of assets, such as stocks, bonds or commodities. Many ETFs track an index, like the S&P 500.

The biggest different between an ETF and a traditional mutual fund is how they’re traded. Mutual funds are sold once a day so the price stays fixed for that day’s trading. An ETF is traded on an exchange just like a stock, which means the price can go up or down over the course of the day.

ETFs offer more diversification with less risk

The 2008 financial crisis had a big impact on millennials’ outlook on investing. A large portion of millennials, 36%, say they’d rather try to match the market than beat it, according to a UBS report. That tendency towards toward playing it safe is one reason why ETFs make sense for 20-somethings.

Exchange-traded funds by nature are designed to match the performance of the index they track. If you invest in an ETF that tracks an index with a consistent rate of return, you’re in a better position to see steady growth in your portfolio. While investing in individual stocks has the potential for bigger rewards, they’re also much more volatile. That volatility clashes with the conservative mindset millennial investors tend to gravitate towards.

Because they hold a variety of assets, ETFs are an easy way to mix things up with your investments. Instead of buying a stock here or a bond there, you can get them all in one exchange-traded fund. You can target your investments even more by choosing ETFs that are linked to specific sectors like healthcare or tech. If you’re in your 20s and still learning the ropes of investing, ETFs take a lot of the guesswork out of diversifying.

ETFs are easier on millennials’ wallets

Cost makes ETFs more appealing. Mutual funds, particularly actively managed funds, can come with high fees. ETFs, on the other hand, tend to be more cost-efficient because the assets they hold aren’t swapped out as often. Not only that, but the initial buy-in is usually cheaper. You generally just need enough cash to buy one share.

Having ETFs in your portfolio can come in handy at tax time. When the underlying assets in a mutual fund are sold, earnings are subject to capital gains tax. Because the assets in an ETF don’t turn over as often, you’ll have fewer taxable distributions.

Being able to avoid capital gains tax is a plus for 20-somethings who can’t afford to see their tax bill skyrocket. If you can’t pay, you run the risk of a tax lien, which will show up on your credit report. You can see your free credit report on Credit Sesame.

Choosing an ETF

There are thousands of ETFs to choose from and new ones launch all the time. If you’re just getting started with investing or you’ve been at it for a while and you’re ready to move into exchange-traded funds, you need to know how to pick the right one. Here are the most important factors to consider:

>Asset class – Different ETFs fit into different asset classes. For example, some are focused on stocks while others concentrate on bonds. When you compare ETFs, look at the asset class to determine where a particular fund fits into your overall asset allocation.

>Index – Index ETFs offer the same broad approach to investing but the underlying indices can be very different. Beginners should stick to ETFs that track a well-known index versus one that only tracks a small slice of the market.

>Sector performance – If you’re considering a sector ETF, spend some time studying the trends in the sector you’re interested in. If your focus is on energy, for example, look at the overall energy market and how energy ETFs have performed over the last few years. Have returns been steady or have there been major swings in fund pricing? Looking at the sector’s past track record and recent behavior is a good way to gauge where it might go next.

>Expense ratio – ETFs offer advantages to millennials in terms of cost but don’t assume that the fees are the same from one fund to the next. Look at the fund’s fee schedule to find its expense ratio. This is the percentage of your assets that go towards management expenses each year. The higher the ratio, the more profits investors must hand over.

>Trade fees – The expense ratio isn’t the only cost millennial investors need to be concerned with. If you trade ETFs through a brokerage, the broker may charge a commission every time you buy or sell shares. Discount brokers tend to charge the least but you could still shell out $5 to $10 a trade, which can add up pretty quickly.

>Liquidity – Liquidity refers to how easy it is to convert your ETF shares back to cash if you decide to sell. Ideally, look for exchange-traded funds that have a high trading volume and a high degree of liquidity in case you need to get your money back in a pinch. The kinds of assets held in a particular ETF can give you a sense of how liquid the fund is.

While younger investors’ pessimism towards the market is understandable, it can actually hurt them in the long run. If you’re in your 20s and you’ve been leery of stocks or mutual funds up to this point, investing in ETFs is a cost-effective way to bump up your earnings without exposing yourself to high risk.

 

About Our Sponsor Credit Sesame

It’s our mission to be the credit and loan expert and advisor—finding the best way for you to manage your credit and loans to save money and build wealth. Get your credit score, and more from Credit Sesame.

Filed Under: ETF
Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.

Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.

About Robert Farrington

Robert Farrington is America's Millennial Money Expert, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.

One of his favorite tools is Personal Capital, which enables him to manage his finances in just 15-minutes each month. Best of all - it's free!

He is also diversifying his investment portfolio by adding a little bit of real estate. But not rental homes, because he doesn't want a second job, it's diversified small investments in a mix of properties through Fundrise. Worth a look if you're looking for a low dollar way to invest in real estate.

Comments

  1. April Cook says

    June 15, 2016 at 11:07 am

    I’m thinking of getting in to investing,and I don’t really know where to start. Would ETFs be good for beginners, or should I try something else first? I like that these have a higher return than cash investments, even if they are a little riskier. Thanks for this helpful information!

    Reply
    • Robert Farrington says

      June 15, 2016 at 11:34 am

      They are great for beginners – remember, there are thousands of different ETFs. Some are higher risk, some are lower risk. You need to find some that match your investing style.

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *


  • Popular Posts

    • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
    • Side Hustle Ideas: 50+ Ways To Make Money Fast
    • 30 Passive Income Ideas You Can Use to Build Real Wealth
    • Secret Ways To Get Student Loan Forgiveness
    • Top Student Loan Scams
    • The Best Investing Blogs Of 2019 (and more great reads)
    • The Top Ways To Get Student Loan Forgiveness
    • 5 Personal Finance Habits That Will Make You Rich
    • The Full List Of Student Loan Forgiveness Programs By State
    • FedLoan Servicing – The Worst Student Loan Servicer
  • Fun Resources

    • The College Investor Audio Show Podcast
    • Student Loan Debt Movement
    • 2019 Side Hustlin’ Student Scholarship Finalists
    • Online Brokerage Comparison Tool – Find The Best Stock Broker For You
    • The Full List Of Student Loan Refinancing Companies
    • Tax Help Center
    • Daily Investing Tips
  • Ultimate Guides

    • The Definitive Guide To Student Loan Debt: Everything To Know About Your Loans
    • The Full List Of Student Loan Forgiveness Programs By State
    • Student Loan And Financial Aid Programs By State
    • The Ultimate IRA Contribution Guide
    • The Ultimate Guide to Saving For Retirement
    • The Ultimate College Internship Guide

Search

Credit Cards

  • The Top 10 Best Rewards Credit Cards
  • The Top 10 Cash Back Credit Cards
  • The Best Credit Cards To Maximize Travel Rewards
  • The Best Travel Credit Card Reward Strategy
  • Top Small Business Credit Cards
  • Best Balance Transfer Cards
  • Best Student Credit Cards

Banking

  • The Best Free Checking Accounts For December 2019
  • The Best Online Banks For Your Money In 2019
  • The Best Bank CD Rates Of December 2019 (updated daily)
  • Top 10 Best Money Market Accounts For December 2019 (Updated!)
  • 10 Best High Yield Savings Accounts Of December 2019 (Rates Updated Daily)
  • The Best Checking and Saving Account Bank Bonus Offers

Student Loans

  • The 10 Best Places To Refinance Student Loans In December 2019
  • Best Private Student Loans To Pay For College In December 2019
  • How To Find The Best Student Loans And Rates In 2019

Investing

  • Best Online Stock Brokers In 2019 (According To Readers)
  • The Best Places To Open An HSA (Health Savings Account)
  • The Top Five Best Investing Apps That Let You Invest For Free In 2019
  • How To Buy Stocks Online For Free

Insurance

  • The Top 10 Online Life Insurance Companies
  • The Ultimate Guide To Renters Insurance – Everything You Need To Know
  • The Cheapest Car Insurance For College Students
The College Investor

At The College Investor, we are deeply committed to helping you make more money by getting out of student loan debt and starting to invest to build wealth.

 

COPYRIGHT © 2009 – 2019 THE COLLEGE INVESTOR

Guides And Resources

  • The Definitive Guide To Student Loan Debt: Everything To Know About Your Loans
  • Student Loan Forgiveness Programs By State
  • Best Student Loan Refinancing Companies
  • 30 Passive Income Ideas You Can Use to Build Real Wealth
  • 80 Different Ways To Get Student Loan Forgiveness
  • Email
  • Facebook
  • Instagram
  • LinkedIn
  • Pinterest
  • Twitter
  • YouTube

  • How We Make Money
  • Privacy Policy
  • Terms of Service
  • Archives
  • Advertise
  • Press Page