Much like buying a set of wheels, choosing the
vehicle can depend on one's means and station in life. But
whatever vehicle is needed, whether for supercharged performance
or a smooth ride, exchange traded funds have enough flexibility
to get both the younger set and older investors where they want
ETFs have been on the road only as long as the current
generation of young adults. And for these millennials, the funds
can fit their investment needs nicely.
"I think ETFs are a great way to capture the market and at the
same time do it in a low-cost and efficient way," says Sophia
Bera, the founder of Minneapolis-based Gen Y Planning, which
advises millennials in the 25-35 age range.
Similar But Different
With broadly diversified baskets of stocks, bonds and/or
futures, ETFs are similar to index mutual funds, but they trade
throughout the market day like stocks.
Bera's young clients often come to her with a large amount of
cash but also with large uncertainty about the basics of
planning for retirement
-- how much of the cash they should earmark for emergency savings
and how much to invest in a retirement or brokerage account.
In most cases, Bera will use ETFs to construct a portfolio.
She notes that discount brokerage firms such as
allow her to trade an ETF for as little as $7 -- much less than
the commissions that some mutual funds charge.
Similarly, the management expenses of ETFs are typically much
lower than those of mutual funds. The average expense ratio of
0.58% for ETFs is far lower than the 1.11% for mutual funds,
according to 2012 data cited by Vanguard Group.
For Ann Minnium, a principal at Concierge Financial Planning
in New Jersey, the standout feature of ETFs is their versatility.
While both ETFs and mutual funds can provide a diversified
portfolio of stocks and bonds, mutual funds tend to have
"With ETFs, you can buy (just) one share," she says. The low
barrier to entry is a main draw of ETFs, especially for the
young, but Minnium notes that older investors have as much to
ETFs are more tax-efficient than comparable mutual funds,
because of their low turnover and the way they are structured.
These features matter to those in their 40s and beyond.
And for clients who have reached retirement, Minnium's
strategy involves fixed-income ETFs with fixed maturity dates.
They allow her to "stack" ETFs that mature in two to four years,
thereby supplying a retiree with stable income.
Versatility Feeds Growth
Their appeal to different age groups has contributed to ETFs'
surge in demand in recent years. The number of ETFs has grown
from 102 in 2001 to 1,337 with total net assets of more than $1.7
trillion, according to the Investment Company Institute.
The decision about whether to invest in equities through an
ETF or mutual fund, or how to allocate resources among these
asset classes, rests on a few factors.
"It depends on the purpose of the account," Bera says. For a
"stagnant portfolio" -- say, a rollover from an IRA -- to which
money is not being added on a regular basis, she advises an ETF
because of the low trading cost. But if it is an IRA account to
which regular contributions are being made, she suggests a
no-load mutual fund.
"The expense ratio may be a bit higher than with an ETF, but
you don't have to pay that trading fee every month," she
Keep in mind, though that most major brokerages offer some
, for example, has about 100 of them, though some restrictions do