Top ETFs for Young Investors: Since the moment they finished high school, members of Generation Z have had an outsized influence on the labor market, the workplace, and the world economy. A quick look at social media shows why.
Gen Z-ers have paid attention to the lifestyles that their Baby Boomer grandparents were able to achieve, and they have noticed the obstacles that prevented their Gen X and Millennial parents from reaching the same major financial milestones.
Gen Z is pessimistic about the generation’s financial prospects, and they discuss the challenges of paying for education, buying a home, and starting a family openly and articulately in online forums.
However, they have already shown themselves to be adaptable, innovative, and resilient – and they have no intention of foregoing the lifestyles they want because of daunting economic conditions.
Many have decided to get involved with investing early so they can take advantage of the time value of money to build their wealth and achieve their financial goals.
A long list of companies – some new, some with a long history in the financial services industry – have developed specialized products and services tailored to the unique needs of those just starting out in the stock market. For example, there are digital banks, low or no fee brokerage accounts, and an endless supply of educational materials, tools, and resources.
However, it isn’t always practical to find the best stock for beginners by combing through hundreds of web pages. Even if there is no shortage of time that can be dedicated to research, the fact is that there are no guarantees in investing. Even the most promising stocks can lose money, and designing a well-balanced, diversified portfolio is difficult for even the most sophisticated investors.
A better option for young investors or those who are new to the stock market is a low-cost fund that delivers all the benefits of a customized portfolio in a single share. Most people are familiar with mutual funds, which offer significant advantages over buying one stock. New investors aren’t as familiar with exchange-traded funds (ETFs), but it is worth getting to know them. ETFs have become one of the most popular ways of getting involved in the stock market without overpaying for fees, commissions, and similar.
What are ETFs? How do ETFs compare to mutual funds? Most importantly, which ETFs are best for young and beginner investors?
ETFs vs Mutual Funds: Which Is Best?
ETFs and mutual funds are based on the same concept. Many investors come together and pool their resources, then a designated fund manager handles the details. That includes the fund investment strategy, as well as when and what to trade. Investors own shares in the fund, and share prices fluctuate with the value of the underlying assets.
There are mutual funds and ETFs designed with all sorts of themes in mind. Some focus on companies in a particular market cap category while others focus on a specific geography. Some specialize in certain sectors, e.g., technology, and others take an expansive approach by investing in S&P 500 companies or the market as a whole.
Though there can be actively managed ETFs and passively managed mutual funds, the opposite is far more common.
A majority of ETFs are passively managed index funds, which means the ETF portfolio matches an underlying index. For example, an ETF with a stated objective of matching the S&P 500 invests in the 500 companies that make up that index.
Passive fund managers don’t spend time researching prospective stocks or developing complex risk-mitigation strategies, so there is no need to charge substantial fees.
Actively-managed funds, which make up a large portion of available mutual funds, require more hands-on care. Whether or not they are successful, fund managers charge higher fees, and mutual funds often take a percentage of gains as commission.
Aside from the fact that ETFs tend to be passively managed and therefore less expensive than mutual funds, there are technical differences in when and how ETF and mutual fund shares can be traded. As the name suggests, shares of exchange-traded funds (ETFs) are bought and sold on stock exchanges in much the same way standard stocks are traded. Transactions can be made any time the exchange is open for trading.
Mutual funds don’t trade on exchanges. All transactions are processed after the market closes, once the value of the fund (net asset value or NAV) and the price of each share can be calculated.
The final significant difference between ETFs and mutual funds is one that carries tremendous significance for young investors and those who are new to investing. Shares of an ETF can be purchased one at a time for the market price, while many mutual funds have a minimum initial investment.
While some mutual funds allow new investors to get started with a small amount of capital – perhaps $250 – many require a minimum investment of $2,500, $5,000, or more. That’s not always practical or possible for young investors, which makes ETFs a far better option.
What Are The Best ETFs For Young Investors?
Choosing the best ETF is easier than buying individual stocks, but that doesn’t mean research can be eliminated altogether. Differences in the fund’s objective, strategy, theme, and fee structure can have a dramatic impact on long-term returns.
These are some of the best ETFs available. They are managed by reputable firms, and their fees are reasonable. Better still, they have a history of achieving their investment objectives.
Vanguard Total Stock Market ETF (VTI)
Young investors can have a stake in the entire stock market with Vanguard Total Stock Market ETF.
This fund’s objective is to track the CRSP US Total Market Index, and it has more than 3,900 stocks in its portfolio – all domestic.
VTI’s expense ratio is low at 0.03 percent, and it has returned 7.16 percent year-to-date – almost exactly on par with the benchmark index.
The fund’s top ten holdings include the following:
Apple – 6.09 percent of total portfolio
Microsoft – 5.27
Amazon.com – 2.21
NVIDIA – 1.60
Alphabet (Class A) – 1.52
Tesla – 1.37
Berkshire Hathaway (Class B) – 1.32
Alphabet (Class C) – 1.29
Facebook (Class A) – 1.16
Exxon Mobil – 1.10
VTI is right for investors who want a taste of everything the stock market has to offer. It includes large, mid, and small-cap equities across industries and risk profiles.
Market Cap Focused ETFs
Investors who prefer a more targeted strategy can choose from funds that focus on large, mid-sized, or small companies.
Small-cap companies have a market capitalization of $2 billion or less. The benefits of small-cap funds include greater potential for growth which may translate into higher returns. However, it is important to note that small-cap stocks, and therefore small-cap funds, tend to be more volatile than their large and mid-cap peers. T
hey may also be less liquid, and there is less transparency. Analysts are less likely to devote time to these companies. For young investors who have a longer timeline to retirement, a higher risk appetite can make more sense.
Two of the best small-cap ETFs include:
iShares Russell 2000 ETF (IWM)
The iShares family of funds is managed by the BlackRock Investment Management Company – one of the most successful and respected firms in the industry. IWM is designed to track the performance of the Russell 2000 Index, which is made up of 2,000 small domestic companies.
IWM’s expense ratio is low at 0.19 percent, and it had a loss of (11.63) percent over the past 12 months. That is in line with the benchmark index.
The fund’s top ten holdings include the following:
Shockwave Medical – 0.41 percent of total portfolio
Crocs – 0.36 percent
Apellis Pharmaceuticals – 0.33 percent
Inspire Medical Systems – 0.33 percent
Iridium Communications – 0.32 percent
Emcor Group – 0.32 percent
Texas Roadhouse – 0.32 percent
Saia – 0.31 percent
Kinsale Capital Group – 0.30 percent
Prometheus Biosciences – 0.29 percent
Though the iShares Russell 2000 ETF doesn’t offer diversification based on company size, it does touch upon every industry. There are tech stocks, restaurant stocks, healthcare stocks, and pharmaceutical stocks, among others, represented in every share of IWM.
As a young investor, gaining exposure to the broader market is a smart idea because over the course of an investor’s lifetime so much can change and it’s hard to predict which stocks in which sectors will win. Holding a basket that has exposure to all sectors is often the smartest bet.
Vanguard Small Cap Value ETF (VBR)
Vanguard’s Small Cap Value ETF also sticks with small US companies valued at less than $2 billion, but it uses a different index as a benchmark.
VBR seeks to mirror the returns of the CRSP US Small Cap Value Index, and it holds nearly 850 stocks in its portfolio.
VBR’s expense ratio is low at 0.07 percent, and it has returned 0.61 percent – the same as its benchmark index.
The fund’s top ten holdings include the following:
IDEX Corp. – 0.68 percent of total portfolio
Reliance Steel & Aluminum – 0.59 percent
Atmos Energy – 0.58 percent
Bunge Ltd. – 0.56 percent
Builders FirstSource – 0.51 percent
Gaming and Leisure Properties – 0.51 percent
Booz Allen Hamilton Holding Corp. (Class A) – 0.48 percent
Kimco Realty Corp. – 0.47 percent
Carlisle Cos. Inc. – 0.45 percent
RPM International Inc. – 0.44 percent
Though this ETF, along with most small-cap ETFs, is considered high-risk, it can still be a smart choice for young investors.
Small companies have more room to grow – most just need enough time to realize their potential. Young investors with long investment horizons can wait for that growth.
Vanguard Mid Cap ETF (VO)
Mid-cap companies are valued between $2 billion and $10 billion, and they offer a comfortable balance between the risks of high-growth small-cap stocks and the low returns of established large-cap stocks.
These modestly sized companies are more agile and adaptable than their large-cap peers, and they enjoy greater financial security than organizations valued at less than $2 billion.
The best mid-cap ETF for young investors is widely considered to be the Vanguard Mid Cap ETF.
VO uses the CRSP US Mid Cap Index as its benchmark, and it holds around 350 medium domestic stocks in its portfolio. VO’s expense ratio is low at 0.04 percent. It has returned 3.88 percent year-to-date, which is in line with its benchmark.
The fund’s top ten holdings include the following:
Amphenol Corp. (Class A) – 0.79 percent of total portfolio
Motorola Solutions – 0.78 percent
Microchip Technology – 0.75 percent
DexCom – 0.73 percent
Corteva – 0.70 percent
MSCI (Class A) – 0.69 percent
Realty Income Corp. – 0.68 percent
Arthur J Gallagher & Co. – 0.66 percent
Cintas – 0.65 percent
Nucor – 0.65 percent
As with small-cap funds, the Vanguard Mid Cap ETF offers automatic diversification with representation from every industry. It carries a little less risk than the small cap funds, and when all goes as planned, its returns are a little higher than the large-cap funds.
Vanguard S&P 500 ETF (VOO)
Large-cap companies are the behemoths valued at $10 billion or more. In the case of Microsoft, Amazon, Apple, and Alphabet, the market cap is over $1 trillion.
Though some large-cap companies still demonstrate impressive growth despite their massive size, large-cap stocks are generally expected to grow more slowly than mid-cap and small-cap stocks.
However, they offer more stability, less volatility, and significantly less risk in exchange for the reduced returns.
While there are indexes that track large-cap stocks using a variety of methods, the most basic large-cap index is generally considered the best benchmark for large-cap investing: the S&P 500.
Vanguard’s S&P 500 ETF aims to do exactly that. VOO has a low expense ratio of 0.03 percent, and it has returned 7.47 percent year-to-date. That’s quite close to the S&P 500 benchmark.
The fund’s top ten holdings include the following:
Apple – 7.11 percent of total portfolio
Microsoft – 6.22 percent
Amazon.com – 2.67 percent
NVIDIA – 1.98 percent
Alphabet (Class A) – 1.79 percent
Tesla – 1.62 percent
Berkshire Hathaway (Class B) – 1.61 percent
Alphabet (Class C) – 1.57 percent
Meta Platforms (Class A) – 1.37 percent
Exxon Mobil – 1.31 percent
When in doubt, an ETF that successfully tracks the S&P 500 is always a good move. These large companies include some of the best-known brands in the world, and they only made the index after demonstrating a long track record of growth and stability.
Tech-Themed ETFs
There are three big advantages to investing in tech-themed ETFs. First, nearly everyone agrees that this sector will grow by leaps and bounds in the coming years – that means higher than average profit potential.
Second, tech stocks struggled in 2022, and many lost substantial value. Investing in a tech ETF now may deliver additional returns as tech stocks recover.
Finally, tech companies tend to be higher risk than those in more established industries. An ETF mitigates that risk by spreading it out across dozens of companies.
These are four of the top tech-themed ETFs:
First Trust NASDAQ Cybersecurity ETF (CIBR)
One the fastest-growing areas in technology in cybersecurity. Cyber-attacks have become more frequent, and online criminals are constantly innovating to get ahead of data protection initiatives.
Security attacks cost businesses billions every year, and that figure is growing. Worse still, many organizations don’t have appropriate safeguards in place. That’s expected to change, and industry experts project greater investment in online protective measures. All that bodes well for cybersecurity firms and their investors.
First Trust offers one of the few ETFs specifically focused on this niche in the tech sector: the First Trust NASDAQ Cybersecurity ETF.
CIBR’s objective is to match the Nasdaq CTA Cybersecurity Index, which includes a narrow segment of the tech market.
Specifically, the index focuses on companies that build, implement, and/or manage security protocols for public and/or private networks, computers, data centers, and mobile devices.
CIBR has a relatively low expense ratio of 0.60 percent, and it has 35 companies in its portfolio. Year-to-date, it has returned 10.56 percent, which matches its benchmark index’s returns.
The fund’s top ten holdings include the following:
Fortinet – 6.62 percent of total portfolio
Palo Alto Networks – 6.21 percent
Broadcom – 6.13 percent
Cisco Systems – 6.03 percent
Infosys Limited (ADR) – 5.08 percent
Akamai Technologies – 3.32 percent
CrowdStrike (Class A) – 3.31 percent
Open Text – 3.28 percent
VeriSign – 3.21 percent
Thales – 3.20 percent
Global X Robotics & Artificial Intelligence ETF (BOTZ)
Artificial Intelligence (AI) has been in the media spotlight since ChatGPT rolled out, but ChatGPT is just the tip of the iceberg in terms of AI use.
Companies of all sizes, from startups to industry leaders, are exploring AI capabilities. They are enhancing products and services through the use of robotics and AI – a trend that is projected to increase exponentially over the coming decade.
In 2021, the estimated global robotics market value was approximately $55 billion. That could be as high as $91 billion by 2026 according to researchers.
BOTZ holds 44 of the most promising robotics and AI stocks, and its objective is to match the Indxx Global Robotics & Artificial Intelligence Thematic Index.
BOTZ has a reasonable expense ratio of 0.68 percent. Over the past 12 months, it has recorded a loss of (11.90) percent, which is slightly better than the underlying index.
The fund’s top ten holdings include the following:
Intuitive Surgical – 8.91 percent of total portfolio
NVIDIA – 8.78 percent
KEYENCE – 8.12 percent
ABB – 8.00 percent
FANUC – 7.60 percent
Omron – 4.45 percent
Yaskawa Electric – 4.40 percent
Dynatrace – 4.31 percent
SMC Corporation of America – 4.28 percent
Cognex – 4.08 percent
Invesco S&P 500 Equal Weight Technology ETF (RYT)
Invesco’s S&P 500 Equal Weight Technology ETF uses the S&P 500 Equal Weight Information Technology Index as a benchmark.
Essentially, this index – and subsequently the RYT ETF – pull out all of the information technology stocks from the S&P 500. The portfolio doesn’t give larger or more profitable companies more weight – each is held in equal amounts.
There are a total of 68 stocks in RYT’s portfolio, and it has a low expense ratio of 0.40 percent. Year-to-date, the ETF has returned 13.89 percent, which is slightly lower than the benchmark index but well above the full S&P 500 index.
The fund’s top ten holdings include the following:
Intel – 1.68 percent of total portfolio
NVIDIA – 1.67 percent
Tyler Technologies – 1.67 percent
Microsoft – 1.65 percent
Akamai Technologies – 1.64 percent
Fortinet – 1.64 percent
Adobe – 1.63 percent
Micron Technology – 1.62 percent
Salesforce – 1.62 percent
Oracle – 1.62 percent
Invesco QQQ Trust (QQQ)
Invesco’s QQQ Trust is reminiscent of Cathie Wood’s ARK Invest family funds. Like ARK ETFs, the Invesco QQQ Trust is focused on disruptive innovation. That includes new technology in streaming entertainment, augmented reality, big data, cloud computing, electric vehicles, mobile payments, and similar.
QQQ’s portfolio currently holds 101 stocks that meet its criteria for innovation. The stocks range from startups to some of the largest companies in the world – and not all are strictly in the tech sector.
Some of the biggest innovators can be found in financial services, energy, healthcare, and consumer staples. Nine sectors are covered in the full portfolio.
QQQ has a low expense ratio of 0.2 percent, and it is keeping pace with the NASDAQ 100 Index. Year-to-date, QQQ has returned more than 20 percent – nearly three times the returns of the broader S&P 500 Index.
The fund’s top ten holdings include the following:
Microsoft – 12.65 percent of total portfolio
Apple – 12.42 percent
Amazon.com – 6.22 percent
NVIDIA – 5.11 percent
Alphabet (Class A) – 3.80 percent
Alphabet (Class C) – 3.75 percent
Meta Platforms (Class A) – 3.73 percent
Tesla – 3.50 percent
Broadcom – 2.01 percent
PepsiCo – 1.95 percent
Tech-focused ETFs were hit hard by the 2022 selloff of growth stocks, but most agree that was a temporary setback. The price of robotics and AI is dropping, the need for cybersecurity is growing, and technology is becoming a bigger part of daily life. The consensus is that more companies will begin incorporating advanced technology like robotics, AI, and cybersecurity into operations over the next three to five years, which is good news for tech investors.
Growth ETFs
Technology stocks get the most attention among growth investors, but they aren’t the only companies that are growing quickly.
ETFs that focus on a growth objective may be heavily weighted towards tech, but they add stocks from other industries into the mix. That reduces the risk that comes with over-concentration in a single industry, and it offers an opportunity to benefit from other businesses on a strong growth trajectory.
These are two of the top growth ETFs:
Schwab US Large Cap Growth ETF (SCHG)
Large-cap stocks are not typically considered growth stocks, but the Schwab US Large Cap Growth ETF is unwilling to trade returns for reduced risk.
This fund tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index in an effort to generate growth without increasing risk. SCHG has a low expense ratio of 0.04 percent, and it holds a total of 246 stocks. Year-to-date returns total 17.46 percent, which nearly matches the underlying index.
The fund’s top ten holdings include the following:
Apple – 13.96 percent of total portfolio
Microsoft – 12.21 percent
Amazon – 5.20 percent
NVIDIA – 3.78 percent
Alphabet (Class A) – 3.58 percent
Alphabet (Class C) – 3.13 percent
Tesla – 2.86 percent
Meta Platforms – 2.77 percent
UnitedHealth Group – 2.69 percent
Visa – 2.16 percent
Vanguard Growth ETF (VUG)
The Vanguard Growth ETF also has a goal of delivering growth without increasing risk by sticking with large-cap companies.
It tracks the CRSP US Large Cap Growth Index, and it has a low expense ratio of 0.04 percent. VUG has returned 17.24 percent year-to-date, which aligns with the CRSP US Large Cap Growth Index.
The fund’s top ten holdings include the following:
Apple – 13.43 percent of total portfolio
Microsoft – 11.63 percent
Amazon.com – 4.88 percent
NVIDIA – 3.52 percent
Alphabet (Class A) – 3.35 percent
Tesla – 3.02 percent
Alphabet (Class C) – 2.86 percent
Visa (Class A) – 1.92 percent
Mastercard (Class A) – 1.68 percent
Home Depot – 1.63 percent
ETFs For Young Investors: The Bottom Line
ETFs are a good choice for young investors because most have low fees, no minimum investment requirement, and the convenience of trading throughout the day. They are available through popular online trading platforms like E*Trade, Fidelity, and Robinhood, and they make it easy to build a diversified portfolio – every share represents a basket of stocks.
Investing early and often is the best way to build long-term wealth, thanks to the time value of money. Compounding returns have historically delivered long-term gains. The more time allowed for compounding, the higher the final value of the portfolio.
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