If there’s one thing that makes all the difference in the world when it comes investing, it has to be time. Time has the ability to help heal your portfolio after the market’s various gyrations and volatility. Time helps you recover from losses, and the magic of compounding is based on time. The longer you have to use the power of compounding, the more money you will have. That’s a proven fact.
And there’s no one group that has more time on their hands than the Millennials.
With many Millennials now entering the workforce, they have entire careers to go through to help drive savings and power the magic of compounding. With that in mind, the sooner you start, the better. Retirement planning, which today is most likely an afterthought, should start creeping in to the forefront of their minds.
With those longer time lines, Millennials have the luxury to tackle growth head on with regards to their investments. That’s great news as some of the best exchange-traded funds (ETFs) are truly long-term plays-almost custom made for younger investors.
Here’s ETFdb’s look at five of the best ETFs made for Millennials.
1. iShares Exponential Technologies ETF (XT )
Millennials and cutting-edge technology go hand in hand. After all, this was the first generation to grow up with personal computers. And today’s tech landscape is pretty cutting edge as well. Big data, 3-D printing, nanotechnology, and cloud computing are just a few of the buzzworthy sub-sectors of the tech marketplace.
The iShares Exponential Technologies (XT ) owns them all. XT tracks the Morningstar Exponential Technologies Index, which is a measure of the hypothetically paradigm-shifting technologies that have the potential to transform society. That includes everything from robotics to gene sequencing. XT basically owns the high-tech of the high technology world. For Millennials with very long horizons, XT could be the perfect addition to their portfolios.
2. Guggenheim S&P 500 Pure Growth ETF (RPG )
Again, longer time lines should emphasize growth and there’s a whole style of investing dedicated to that theme. Growth stocks are defined as those whose earnings are expected to grow at an above-average rate when compared to their sector or overall market. Those earnings power expanding multiples and share prices. Typically, growth stocks are about capital gains which should appeal to Millennials and their time lines. The problem is many growth stock indexes also overlap with many value indexes. Both the S&P 500 Growth Index and S&P 500 Value Index contain many of the same firms.
The Guggenheim S&P 500 Pure Growth ETF (RPG ) overcomes this by eliminating the overlap between the two. What investors are left with is exposure to “pure” growth stocks. That pure exposure has provided RPG with additional gains when compared to its non-growth peers since the ETFs inception. Millennials have the best opportunity to benefit from RPG’s growth potential.
3. PowerShares FTSE RAFI Emerging Markets ETF (PXH )
For Millennials, emerging markets are one of the best market segments to place bets. These developing nations, which are faster moving, and becoming more modernized and industrialized, will take time to realize their full potentials. As they get there, they offer plenty of portfolio gains as well. Likewise, the hiccups along the way (they are called “emerging” for a reason) will be balanced out by time.
The PowerShares FTSE RAFI Emerging Markets ETF (PXH ) screens for four fundamental factors: book value, cash flow, sales and dividends to construct its portfolio. That creates a stronger and cheaper portfolio of emerging-market stocks. Basically, PXH eliminates much of the “emerging” from its portfolio. It also provides a much more balanced portfolio of nations and isn’t particularly top heavy. That gives Millennial investors a leg up as PXH includes those emerging markets that still have plenty of growth left.
4. First Trust Dorsey Wright Focus 5 ETF (FV )
There can be plenty of money to be made using various momentum strategies. The problem is that you really need to know what you’re doing, and the potential volatility of these plays can be a huge issue for older investors. Momentum plays often trade on rumors, predictions, and new product launches. There’s usually very little actual substance when it comes to these stock price movements, and they can be prone to huge drops as well when the bottom falls out. Millennials, lacking market and trading acumen, are probably the best suited for these strategies as once again, time lines make up for any losses.
The First Trust Dorsey Wright Focus 5 ETF (FV ) takes a unique approach to momentum investing. FV owns other ETFs that manager DWA believes offer the greatest potential to outperform the other ETFs in the selection universe. It selects five funds from First Trust using various screens. FV is rebalanced only when an ETF drops out of its screening criteria. Holdings can change every week. What millennial investors get is a way to be “traders” without having to do any actual trading.
5. iShares US Fixed Income Balanced Risk ETF (INC )
Everyone should own a dose of bonds in their portfolios, even growth-seeking Millennials. Bonds can act as stability when the stock market gets wonky, and are still one of the best places to get diversification. The problem is that the last 30 or so years has been a prime market for bonds and that isn’t likely to be repeated. Which is why an unconstrained approach, or smart-beta strategy, for bonds could be a Millennial’s best friend. Such a strategy allows managers to move freely around the entire bond universe looking for the best deals outside of treasuries.
The iShares US Fixed Income Balanced Risk (INC) owns a portfolio of corporate bonds, U.S. Treasuries, and mortgage-backed securities that are selected based on historical risk vs. return efficiency. INC also uses U.S. Treasuries and U.S. Treasury futures contracts to mitigate the Fed’s effect on its bonds. All in all, INC provides investors balance between interest rate risk and credit risk in one ticker. Millennials won’t need a ton of bonds in their portfolios at first, but INC allows them to gain from their benefits without many of the drawbacks.
The Bottom Line
For Millennials, the key is their time line. Their longer horizons allows them to invest for growth. As such, their best ETF choices should cater to those needs. The above picks are just some of the prime options for the generation.
Disclosure: Author is Long XT & FV.