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Why ETFs might be Gen Ys asset of choice

Forget unafforable property, it seems that generation Y's are being increasingly drawn to ETFs as a cheaper and easier investment alternative.

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Generation Y’s and bankers like abbreviations. It separates those in the know from those who wannabe.

It says little however about why younger Australians are taking more of a shine to ETFs – which in the finance world this stands for Exchange Traded Funds, but in text-message speak means Easy To Find.

The latter might be one reason why Jon Howie, Head of iShares Australia and part of the world’s biggest fund manager Blackrock was once asked if ETFs could be bought over the counter at Woolworths with one swipe of a credit card. One day…maybe…but not today.

Apps like that launched earlier this year by small change investment company Acorns Grow Australia, along with automated advice platforms, aka Robo Advice and changes in financial regulations that ban commissions on financial products, are boosting the appeal of ETFs to younger Australians.

Now it seems that despite slow interest at the start, growth in the Australian ETF market has grown in popularity 43 per cent annual growth since 2012.

As it stands the average ETF investor in around 50 years of age but over the past two years the number of generation y’s investing in ETFs has grown to over 20 per cent of all investors, according to BetaShares and Investment Trends.

What’s the appeal?

ETFs are considered low cost, around 1/6 of the management cost a managed fund, according to Mr Howie, and relatively easy to get in and out of, which is good to know should the heat hit the fan like it did with certain managed funds during the financial crisis.

“The things that generation Y really like about ETFs is that they offer them more control and independence then how they perceive accessing investments from managed funds,” he said.

“They want to be able to logon right now and see what’s happening and they don’t want to have to wait five days to move things around, or even pick up the phone and call a broker.”

As it stands there are over a hundred different ETFs on the market, including five newly launched iShares Core ETFs from Blackrock.

ETFs essentially track a group of assets such as shares, cash, currencies, commodities and fixed income products. When you buy an ETF you are buying that structure as a product, and not the underlying assets.

Deborah Kent, financial adviser of Integra Financial Services said unlike shares, you don’t need as much money to invest in ETFs to get the diversity that should protect you from market volatility.

“I wouldn’t be going direct into the share market without a minimum spend of $5,000,” she said, adding that even if you were to use the average $2500 tax refund for individuals this wouldn’t be an ideal amount to invest in the share market.

“If you divide that $2500 in two and put about $1000 into CBA and the rest in BHP, brokage fees are about 3 per cent, which means you’ll spend about $60 in fees and you will still only have two companies. Whereas you can spend the same but get exposure to about 20 companies in an ETF,” said Ms Kent.

What are the risks with ETFs?

Some ETFs are riskier than others. The most common are physical ETFs and the main investment risk is the performance of the underlying assets.

The more complex synthetic ETFs are considered more risky because they have a material exposure to derivatives as well as the underlying assets that the ETF is seeking to track, according to the Australian Securities and Investment Commission’s Money Smart website.

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