Why Millennials favour ETFs

Photo of Rebecca Pritchard, Wealth Enhancers By Rebecca Pritchard, Wealth Enhancers

min read

Simplicity and cost of Exchange Traded Funds a hit with younger investors.

TEST Everyone loves an acronym, and investments are no exception.

ETFs are exchange-traded funds, and they’re awesome. (Not to be confused with EFT - as in EFTPOS). There’s been phenomenal growth in this space since they entered the mainstream market in 1990, now approaching A$6 trillion globally.

ETFs are investment funds built to track an index (like the S&P/ASX200) or basket of assets. ETFs generally do not try to outsmart the market, just follow its performance.

Why are ETFs popular?

The recent ASX Australian Investor Study illustrated that the concept of diversification is sorely misunderstood by many Australians. Forty-six percent of respondents claimed to be diversified while holding an average of 2.7 investment products. As an adviser and strong investment advocate, this is a nauseating statistic.

The adage of keeping all your eggs away from one solitary basket is more applicable to investments than almost any other context!

ETFs allow investors to enjoy instant diversification within either a region (Australia, China etc.), industry (healthcare, financials, agriculture etc.) or investment strategy (yield, growth, geared etc). This can be fantastic for either direct investors or those seeking to invest within a superannuation environment. Any access to these types of investments may either be difficult or expensive to achieve otherwise, let alone taking a diversified approach.

An ETF such as the iShares Global Healthcare ETF (ASX code: IXJ) will provide an investor with exposure to large-, mid- and small-cap companies, investing across biotechnology, healthcare, medical equipment and pharmaceuticals. Can you imagine how difficult and expensive that would be to replicate for do-it-yourself investors?

The market is so competitive for ETFs right now that a product initially promoted as low cost has become even cheaper from a fee perspective, but better value when you consider the wide range of options available. Generally, ETFs are also more tax effective than actively managed funds due to their lower internal turnover (creating capital gains events).

Post-GFC, investors are incredibly mindful of transparency, and are immediately suspicious of what they can’t unravel. ETFs allow investors to view exactly what assets the ETF holds.

ETFs carry risks, like all investments, and the value of your units will rise and fall as the underlying asset values rise and fall. There’s also a risk that the value of your ETF may not track perfectly with the underlying assets, potentially due to liquidity or fees and taxes.

Why are ETFs so exciting for Gen Y?

Gen Yers (born from early ‘80s to early 2000s) are straight to the point. For those who know they want to invest, they’re after a quick, easy and reliable solution. For those who aren’t interested in (or don’t have time for) picking single stocks, and are savvy enough to Google “how to diversify my investments”, ETFs pop up as a logical choice.

A passive ETF strategy can really complement a more aggressive or active investment approach, particularly surrounding property or private investments.

The ETF will provide the liquidity and diversification those assets won’t necessarily offer, without needing to compromise on the growth opportunities.

For our members here at Wealth Enhancers, ETFs can also provide some pretty exciting opportunities to invest in specific industries they feel passionate about. We’re seeing the weight of numbers in investors firstly seeking, and now demanding, an ethical option.

BetaShares Global Ethical ETF (ASX code: ETHI) has rapidly grown to around $90 million since its launch at the beginning of 2017. Ilan Israelstam, Head of Strategy - BetaShares, attributes this to investors seeking core global equities exposure that is aligned to their principles and values.

How can you incorporate ETFs into your portfolio?

ETFs can be bought and sold on the ASX (or other international exchanges) in the same way as shares. This facilitates the liquidity that is one of the ETF market’s strong suits. The ASX has a great tool to help you find a broker or platform that would suit your needs.

There’s also a rise in investment platforms like Acorns, Clover.com.au and Six Park that will recommend an investment allocation and purchase the ETFs for you. As we become more accepting of and excited by fractional investment (owning a portion of an asset), this will grow faster.

You can also chat to your super fund about incorporating an index option in your strategy for long-term financial freedom.

What’s coming up next for ETFs?

The big players in the market are all working to innovate and keep the ETF space exciting, and growing. This means new products are consistently coming to market, transaction costs are reducing and competition for strong returns increasing. Specialised markets are coming into the mix, as well as more specific investment styles, and the overlay of intelligent algorithms to add beta.

About the author

Rebecca Pritchard is a Gladiator at Wealth Enhancers, an award-winning Gen Y financial advisory firm.

From ASX

The free, online ASX ETF course is a great way to learn about the features, benefits and risks of ETFs

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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