The popularity of exchange-traded funds has exploded recently. As part of Money’s series on an ETF for every age, the following discusses appropriate strategies and a fund that is suitable for investors ages 18 to 35.
Playwright George Bernard Shaw once said that youth is wasted on the young. And while that can be interpreted many ways, with regard to personal finance, it can imply a failure to take advantage of the opportunities youth offers.
Some may be delaying contributions to a retirement account. Others could be amassing burdensome credit card debt instead of adhering to a strict budget. Particular to investing, it means failing to understand which equities can produce the greatest risk-adjusted returns.
The younger you are, the longer your investment horizon is, and the more risk you can therefore tolerate. The prevailing theory is that because investors in this age group have more time to recover from losses, they can afford to focus on higher-volatility equities with more upside potential — like tech stocks and growth ETFs.
However, what’s considered “growth” can be subjective. Growth stocks and growth ETFs tend to increase in value rather than yielding income. Understanding how to identify those opportunities and separate them from highly speculative investments is essential.
Check idealism at the door
Novice investors should be careful not to let idealism dictate their investment choices. Companies focused on worthy causes frequently fall into the growth category, and some thematic ETFs attempt to capitalize on this approach, often with little success. While many of us yearn for a cleaner, more equitable world, that doesn’t mean you should invest in funds simply because they appeal to your vision of a utopian future.
The First Trust Global Wind Energy ETF (FAN), for instance, measures the performance of companies involved in wind energy. But beyond its catchy ticker symbol, the ETF leaves much to be desired. Since its inception on June 20, 2008, the fund is down nearly 52%, including a loss of 1.39% over the past year compared to the S&P 500’s gain of nearly 22.5% over the same period. At 0.60%, it also carries a higher-than-usual expense ratio for an ETF.
The Amplify Lithium & Battery Technology ETF (BATT) is another idealistic underperformer. Since debuting in June 2018, it’s down nearly 55%, with a loss of 15.96% over the past five years. And since reaching its all-time high in November 2021, the Global X Lithium & Battery Tech ETF (LIT) is down 57.08%.
By no means am I criticizing ESG investing. But one fundamental aspect of ETF investing is diversification. Younger investors should be aware of the opportunity cost of pigeonholing their investments into niche funds. By doing so, over the long term, they could leave unrealized gains on the table.
Instead, this cohort should be focusing on broad growth.
A tech-heavy, growth-focused ETF
You may be familiar with the Invesco QQQ Trust Series 1 (QQQ). The fund has had its fair share of commercials, some of which aired last year during March Madness as the “Official ETF of NCAA.”
As one of the largest ETFs tracking the tech-heavy Nasdaq-100 index, it has more than $326 billion in net assets and offers index-weighted exposure to enormous growth stocks, including tech giants like Nvidia, Apple and Microsoft. Over the past five years, the ETF is up more than 130%.
But fewer people have heard of the QQQ’s little-sister fund, the Invesco Nasdaq 100 ETF (QQQM). And given that its expense ratio of 0.15% is 25% cheaper and its shares are around $310 less, investors — especially in this age group — should give it the attention it deserves.
QQQM provides nearly identical exposure and weighting to a basket of large cap growth companies in the Nasdaq-100. Its top-10 holdings — which mirror those of QQQ — account for 36.05% of the total portfolio.
Since it launched in October 2020, the ETF has gained 83.40%, including 23.45% over the past year, outperforming the S&P 500 in both instances. For context, the more expensive QQQ marginally underperformed QQQM since the latter’s inception, posting a gain of 82.94%. Icing the cake, QQQM pays a modest dividend currently yielding 0.59%.
Of course, nobody should ever put all their eggs in one basket. But if you’re looking for one ETF that can provide reliable growth via some of the largest companies on Earth, investors from ages 18 to 35 could do worse than QQQM.
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According to a recent report from Money.com, the popularity of exchange-traded funds (ETFs) has skyrocketed in recent years. As part of their series on ETFs for different age groups, they have identified a suitable fund for investors between the ages of 18 and 35. However, they also caution that research and financial considerations may influence how brands are displayed and not all brands are included.
In this age group, many young investors may be missing out on the opportunities that come with youth. This could include delaying contributions to retirement accounts or accumulating credit card debt instead of following a strict budget. When it comes to investing, it could mean not understanding which equities can provide the best risk-adjusted returns.
Since younger investors have a longer investment horizon, they can afford to take on more risk. This often means focusing on higher-volatility equities, such as tech stocks and growth ETFs, which have more potential for growth. However, it is important to understand the difference between growth stocks and highly speculative investments.
Money.com advises novice investors to be cautious of letting idealism dictate their investment choices. While it may be tempting to invest in companies that align with personal values, this does not always lead to successful returns. For example, the First Trust Global Wind Energy ETF (FAN) has underperformed since its inception in 2008, and the Amplify Lithium & Battery Technology ETF (BATT) and Global X Lithium & Battery Tech ETF (LIT) have also seen losses in recent years.
This is not to say that investing in companies with a focus on environmental, social, and governance (ESG) factors is a bad idea. However, it is important for young investors to consider the opportunity cost of investing in niche funds and potentially missing out on diversification and long-term gains.
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