[Editor’s note: “5 ETFs for Savvy Millennial Investors” was previously published in January 2019. It has since been updated to include the most relevant information available.]
When it comes to investing, millennials have a big advantage that older generations do not: time. With the benefit of time, younger investors can take on more risk and put the power of compounding on their sides. Those are powerful forces.
“Compounding returns are the driving force that makes investing so powerful, especially when you’re young and you have time on your side,” according to a CNBC report on millennial investing. “The longer you let your money ride out the ups and downs of the market, the more likely you are to have a positive outcome.”
Another advantage for millennial investors is that given their longer time horizons, they can embrace some unique investments, something that can be accomplished with certain exchange traded funds.
Among ETFs to buy for millennials are standard, adventurous and somewhere in the middle funds, all of which can be mixed within millennials’ portfolios over the course of their investing lives.
Here are some of the best ETFs to buy for today’s younger investors.
SPDR S&P Dividend ETF (SDY)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
Millennial investors should not conflate dividends as being reserved for their grandparents. In fact, some of the best ETFs to buy for younger investors are dividend funds because of the aforementioned compounding and time components. The SPDR S&P Dividend ETF (NYSEARCA:SDY) merits consideration as an ETF to buy and be held for the long-term for several reasons.
Those factors include SDY’s mandate that member firms have dividend increase streaks of at least 20 years and the volatility reducing power this fund’s underlying index, the S&P High Yield Dividend Aristocrats Index, offers.
“From Dec. 31, 1999, to June 30, 2019, the S&P High Yield Dividend Aristocrats generated a total return of 590.3%,” said S&P Dow Jones. “Of the contribution, about 57% was from dividend income, while 43% came from price appreciation.”
Over the long-term, SDY’s benchmark has stacked up favorably against the S&P Composite 1500 and not just in terms of performance, but in terms of better risk-adjusted returns.
“The S&P High Yield Dividend Aristocrats demonstrated defensive features during the down markets of the studied period, with the strategy having a smaller maximum drawdown, less loss, and a lower beta than the S&P Composite 1500,” according to S&P Dow Jones.
Schwab U.S. Mid-Cap ETF (SCHM)
Expense ratio: 0.04%
Millennials can set themselves apart from other generations of investors by embracing mid-cap stocks, an asset class older demographics and their financial advisors have glossed over for decades. The Schwab U.S. Mid-Cap ETF (NYSEARCA:SCHM) is an ETF to buy in this category due in large part to its status as one of the least expensive mid-cap ETFs.
SCHM’s cost “advantage has translated into strong category-relative performance over the long term,” said Morningstar. “From its inception in January 2011 through July 2019, the fund has outperformed the category average by 270 basis points annualized while exhibiting slightly greater risk. On a risk-adjusted basis, the fund outperformed the mid-blend category average.”
The report continued: “Overall, this fund should continue to enjoy a durable long-term edge over many of its competitors thanks to its low expense ratio and lower-than-average cash drag.”
There’s another reason why SCHM is an ETF to buy for younger investors, particularly those that are patient and committed to holding the fund for the long haul: data confirm mid-caps historically beat both large- and small-cap stocks.
“Mid-cap stocks tend to have higher long-term growth potential than large-cap stocks,” according to Morningstar. “This is evidenced by the Dow Jones U.S. Total Stock Market Mid Cap Index’s higher earnings growth compared with the Dow Jones U.S. Total Stock Market Large Cap Index over the trailing five years through July 2019. Furthermore, mid-cap stocks exhibit less volatility than small-cap stocks.”
Xtrackers MSCI USA ESG Leaders (USSG)
Expense ratio: 0.10%
Issuers of environmental, social and governance (ESG) funds are counting on millennials to drive adoption of and assets into these virtuous products. While it remains to be seen how the Xtrackers MSCI USA ESG Leaders (NYSEARCA:USSG) will become an ETF to buy for younger investors, the fund is undoubtedly catching on.
With the support of a Finnish pension plan, USSG debuted with more than $800 million in assets under management. That number has swelled to $1.7 billion, making this ETF to buy one of the largest ESG ETFs. It’s also one of the least expensive, a trait that could lower the coveted millennial crowd of investors.
USSG tracks the MSCI USA ESG Leaders Index.
“In order for companies to be included in the fund, the methodology includes a comprehensive screen that filters out alcohol, weapons, gambling, and other controversial products or activities,” according to ETF Trends.
Global X Millennials Thematic ETF (MILN)
The Global X Millennials Thematic ETF (NASDAQ:MILN) is an ETF to buy for millennials looking to invest in themselves. This fund is much more than a niche product with a narrow focus.
In fact, MILN’s versatility makes a consideration for a broader swath of investors beyond millennials.
MILN holdings include “social media and entertainment, food and dining, clothing and apparel, health and fitness, travel and mobility, education and employment, housing and home goods, and financial services,” according to Global X.
Most of the stocks held by MILN are large- and mega-cap names, including several members of the Dow Jones Industrial Average.
“Examples of specific industries that we believe are well-situated to appeal to Millennials include social media, online streaming services, health and wellness, housing and home goods, healthy food and fast-casual restaurants, e-commerce platforms, FinTech, wearables, and travel,” said Global X in a research piece published earlier this year.
iShares Russell 1000 Growth ETF (IWF)
Expense ratio: 0.19%
Yes, the value factor has been looking good lately, but younger investors with time on their side should be sure to include some growth factors in their portfolios, too. The iShares Russell 1000 Growth ETF (NYSEARCA:IWF) is one of the ETFs to buy for efficient growth exposure.
This ETF to buy gives millennials a deeper bench than the S&P 500 with overweights to the hallmarks of the growth factor – technology and consumer discretionary to the tune of almost 52% of the fund’s weight. While value may be having a moment against growth, both factors remain viable for the long-term.
“The global economy is increasingly dominated by several secular trends: low but stable growth and inflation, the rise of the “cap-light” business model, a secular shift in consumption away from goods and towards services, and unprecedented economies of scale for select technology platforms,” according to BlackRock. “All these trends favor growth stocks.”
As of this writing, Todd Shriber did not own any of the aforementioned securities.