Recently, my dad wrote me an email:
Oh, dear. Are you a millennial?
I’m still not sure what to make of the email, but yes, I am a millennial. Anyway, to get to the point, the Wall Street Journal just ran an article detailing why millennials seem to prefer ETFs over standard mutual funds. A quick reminder- both mutual funds and ETFs are financial products that bundle a lot of stocks and/or bonds, giving you broad access to the stock market. The point of both is to spread your risk around. The difference is that the price of ETFs fluctuates over the course of the day and is traded just like a regular stock, whereas the mutual fund price changes once at the end of the day, and all orders placed over the course of the business day are taken at that end of day price. Essentially, the article argues that millennials prefer ETFs because of their instant and fast paced nature. Your trade is processed instantly, rather than waiting till the end of the day.
So Why Don’t I Like ETFs?
So, before I continue, I do own ETFs. I too, once upon a time, liked the idea of them. And to be clear, if you use an ETF just like a mutual fund- buying shares of the ETF for the long haul, there’s really nothing wrong with them. However, more than a mutual fund, ETFs tempt you to try to time the market- which, unless you have a crystal ball, is a fools game. ETFs also can tempt you into high frequency trading, which as it sounds, is just a lot of timing the market in a short amount of time. High frequency trading typically eats away at most or all of your profits with fees and spreads (the difference between your buy and sell prices).
A good mutual fund, on the other hand, offers no trading fees, and encourages you to park your money for the long haul, which is the only proven way to reliably earn returns in the stock market. Mutual funds also make automatic investing much easier, which is a critical step to ensuring you continually contribute to personal retirement accounts.
If do you insist on following the millennial trend and invest in ETFs, make sure you invest with a broker that offers commission free ETFs, such as TD Ameritrade or Fidelity. And make sure you’re parking your money for the long term- no timing the market and frequent trading.
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.