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Personal Finance for Millennials: Why ETFs Are Their BFFs


The younger generation has all but grown up with exchange-traded funds.

The great recession, Facebook's (NASDAQ:FB) troubled IPO, JPMorgan's (NYSE:JPM) London Whale trading losses, and HSBC's (NYSE:HBC) Libor scandal -- these significant events have caused severe public distrust of Wall Street.

The problem is even more apparent among the younger generation. These days, millennials either avoid investing altogether, or invest with great caution. According to a study conducted by Accenture Wealth and Asset Management Services, 43% of respondents between ages 21 and 30 say they are conservative investors, compared with only 31% of baby boomers, Fox Business reports.

Perhaps that's why millennials are looking more toward ETFs as investment vehicles, given their reputations for providing less volatility and greater diversity and flexibility.

"I think the young demographic has essentially grown up with ETFs. [After all,] the SPDR S&P 500 ETF (NYSEARCA:SPY), the first ETF out there, just celebrated its 20th anniversary [in January], and ETFs have increased exponentially in terms of assets since," Alex Teyf, senior manager of mutual funds and ETF products at TD Ameritrade (NYSE:AMTD), tells Minyanvile. "So [the young] are more familiar with them."

Based on recent client data, TD Ameritrade found that there was a strong correlation between age and the ownership of ETFs, with those aged 26 to 35 holding 12.7% of their assets in ETFs. In contrast, 66- to 75-year-olds held only 6.2% of assets in ETFs.

Young people are also more likely than any other age group to hold international ETFs, which Teyf says is also due to their greater comfort and familiarity with ETFs in general.

"If they're comfortable holding an ETF on the S&P 500 (INDEXSP:.INX), for example, then they will look for comparable exposure to an international market and many of the ETFs that have come online over the past few years are targeting specific foreign or global indexes," Teyf elaborates.

For risk-averse young investors, ETFs are also a way to get exposure to stocks like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) at relatively low prices.

"ETFs are an efficient way of gaining access to some of the better picks in an index," Teyf explains. "If you want to get access to technology stocks like Apple, and you don't want to put all your eggs in one basket and you only have $700 to invest, ETFs are a more effective way of investing the technology sector without taking all the risk to just buy that one symbol."

For millennials who are keen to dip their toes into the world of investing, Teyf has a few tips. "Not all ETFs are created equally -- you really should understand what makes up the holdings of an ETF. And be aware of those metrics that matter when you're talking about ETFs, which are volume and liquidity, assets under management, spread and tracking error."

Twitter: @sterlingwong
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