Start Investing With ETFs
One of the greatest advantages young investors have is time. The more time you have, the more the power of compounding can work for you. But if you're like many other Millennials who are just starting out, building a well-diversified investment portfolio may seem out of reach. ETFs could be a good way to kick-start your savings and investment plan.
"Millennials are the fastest-growing segment of ETF investors. With such strong adoption among this demographic, ETFs are igniting a new generation of investing," said Richard Powers, head of ETF Product Management at Vanguard.
Here's why ETFs are starting to dominate Millennials' portfolios:
- ETFs offer a low-cost way to invest. Funds that track an index, whether ETFs or mutual funds, typically cost less and are more tax-efficient than actively managed mutual funds. The savings that come from investing in a low-cost fund can add up and compound into greater wealth over time. Combine that with the advantage of investing early, and the potential for a difference in wealth can be considerable. One consideration, though, are transaction costs. If you're charged a $7 commission to make a trade, purchasing an ETF share that costs $100 means your investment will need to rise by a little more than 7.5% before you see any gains. However, some fund providers allow you to trade their own ETFs for free if you have a brokerage account with them. So, that $7 commission can be avoided.
- ETFs have a low hurdle to invest. The minimum to purchase an ETF is one share, potentially as little as $100. Contrast this to mutual funds, which require initial investments ranging from $1,000 to $3,000, $5,000 or more. ETFs can make it easier for a new investor to get started, and continue building wealth in manageable increments.1 Also, it doesn't take much to construct a balanced portfolio. You can put $100 in a stock ETF and $100 in a bond ETF to achieve a diversified two-asset-class portfolio which, though simple, can be a great start toward building a portfolio appropriate for your goals. ETFs can be a simple way to build incrementally toward your long-term plan.
- ETFs can offer instant diversification. Most ETFs are designed to match the performance of the index they track. As long as the ETF strategy is broadly invested across the market, such as our first ETF, Vanguard Total Stock Market ETF (VTI), which is diversified across 3,600 stocks, one single share can provide you with all the diversification you need within the U.S. market. But not all ETFs provide the same level of diversification; some ETFs offer concentrated exposure in specific market sectors, such as one of our largest sector ETFs, Vanguard Health Care ETF (VHT), which invests in health care stocks.
So before making any investment moves, determine your investment goal, and research your ETF options.
The Earlier You Start, the Less You Have to Save
This hypothetical example shows just how powerful compounding can be for the early investor. Two people with similar financial goals start investing at different times:
- Dawn starts investing at age 25 and contributes $2,000 each year for 10 years (until she's 35 and has invested a total of $20,000).
- Dave starts investing at age 35 and contributes $2,000 each year for 30 years (until he's 65 and has invested a total of $60,000).
Assuming that their investments earn 8%2 a year, at age 65, Dawn will have $314,870. But Dave will have less, $244,692. So even though Dave saved more and for a longer period of time, Dawn will have over $70,000 more in her retirement account than Dave because she started earlier and her investments had more time to compound. (Sorry, Dave.)
So How Do You Start Investing in ETFs?
You'll need a brokerage account to trade ETFs. Whether you're investing from your retirement or taxable account, if you can buy or sell stocks in it, then you can also buy an ETF.
And the longer you keep your money invested, the better your odds are of overcoming periods of market decline. This is just one factor among many that lead to long-term investing success.
1Trading limits, fund expenses, and minimum investments may apply.
2 Hypothetical rates of return illustrated in this article are not guaranteed.
Notes: All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Vanguard ETF Shares are not redeemable with the issuingfund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. Funds that concentrate on a relatively narrow sector face the risk of higher share-price volatility.
For more information about Vanguard ETFs, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.