The Millennials are the largest generation in U.S. history, surpassing even the baby boomers and earning a collective $2 trillion a year. This influential cohort, born from 1981 to 1997, could account for as much as $8 trillion in earned income by 2025, according to some projections.
But so far, besides shorting student loans or collecting on those debts, Wall Street has found it tough to cash in on Millennials. Investment firm Global X aims to change that with its Millennials Thematic ETF (MILN), which offers exposure to the 75 million-strong generations spending patterns. New Yorkbased Global X, which manages nearly 50 exchange-traded funds and almost $3 billion in assets, launched MILN this month as part of its People suite of thematic ETFs.
The firm, which works with New Yorkheadquartered index provider Indxx, also unveiled the Global X Longevity Thematic ETF and Global X Health & Wellness Thematic ETF. The former specializes in health care, pharmaceuticals and other companies that cater to older consumers; the latter allocates to businesses that serve the health-conscious and the physically active. We feel like we have a good sense of where these groups shop and what they are likely to be interested in over the long term, says Jay Jacobs, director of research at Global X.
Thematic investing has long been a core part of institutional portfolios, but it used to require dedicated research teams and pricey active management. Now a growing number of ETFs are offering thematic exposure; increasingly, investors can pick almost any topic and find a fund that tracks it. For example, the Video Game Tech ETF offered by New Yorkheadquartered PureFunds invests in companies such as Electronic Arts and Nintendo Co. But are these products all theyre cracked up to be?
According to MILNs prospectus, the ETF targets eight Millennial spending categories: social and entertainment; clothing and apparel; travel and mobility; food, restaurants and consumer staples; financial services and investments; housing and home goods; education and employment; and health and fitness. The funds top holdings include Facebook, student housing provider American Campus Communities, restaurant chain Chipotle Mexican Grill and a handful of retailers that skew young, such as Francescas Holdings Corp. all obvious Millennial favorites.
Other names are more surprising: Student loan servicer and noted short target Nelnet makes the list, as does Lending Club, now part of a federal grand jury probe for selling loans that the San Franciscobased peer-to-peer lender may not be able to make good on without drawing on its balance sheet. In some ways those inclusions seem more like a bet against Millennials than an endorsement of their future economic health. Meanwhile, holdings like upmarket retailers Whole Foods Market and Lululemon Athletica, or home ownershipcentered picks such as Home Depot and online real estate marketplace Zillow, suggest a lifestyle that most Millennials may aspire to but can hardly afford.
Jacobs stands by the ETFs constituent companies, though he concedes that the index could evolve as Millennial preferences change. We see evidence that more traditional household formation is on the horizon, he says, adding that members of this generation stand to inherit a total of some $40 trillion from their parents. After Millennials use that wealth to pay off their student loans and credit cards, maybe they can afford a studio apartment on the outskirts of a major city, along with yoga classes above Lululemon or so MILN investors might hope.
Its early days for MILN and other thematic ETFs, but the category looks like its here to stay. Dave Gedeon, Washington-based vice president of Nasdaq Global Information Services, who works on ETF construction and research, says everyone from retail to institutional investors has taken an interest.
Although these new ETFs are untested, name recognition can help to attract investors. In a recent survey of 250 U.S. advisers by private bank Brown Brothers Harriman & Co. and news website ETF.com, 60 percent of respondents said they would invest in an ETF that has been on the market for one year or less. Shawn McNinch, Boston-based global head of ETF services at BBH, which provides a distribution platform for ETFs, says advisers are willing to look past a short track record if the product comes from a brand they trust or offers exposure they seek.
Goldman Sachs made a big splash when they came to market with their ETFs, in large part because of the brand, for example, explains McNinch, who has seen some ETF start-ups join forces with established index providers to gain credibility. The willingness of investors to come in on branding has been a real wake-up call for some mutual funds and other firms that dont have their own ETFs, he says. We see a really strong pipeline of product into the future as more firms bring their ideas to market.
Nasdaqs Gedeon points out that thematic and niche ETFs are replacing costlier investment strategies in institutional portfolios: In some cases weve seen that institutions are looking at thematic ETFs either in addition to or instead of an in-house thematic strategy because they can get the exposure they want without having to devote as many resources to research.
For ETF investors keen on Millennials or any other theme, the key is to understand the index methodology driving a product and whether its a sustainable source of returns, Gedeon adds. No investor is going to be totally familiar with every company in a given product, he says. But if you understand how the product works and how it weights the index of companies, you should be able to make some assumptions about performance.