Millennials have eclipsed baby boomers as the largest living generation, and that represents an opportunity for investors who can identify companies offering the goods and services they want.
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That's the aim of the Global X Millennials Thematic ETF, an exchange-traded fund launched in May that tracks companies that derive a significant share of revenue from millennials, which Global X defines as anyone born between 1980 and 2000.
"What we see is that millennials behave differently from other generations," said Jay Jacobs, director of research at Global X, a $3.8 billion ETF issuer based in New York. "They do not spend in the same way as Gen-X or Baby Boomers, and that's when it becomes an investible theme."
Jacobs spoke recently to The Associated Press about how investors can profit from forecast growth in millennials' spending power in the years ahead. Questions and answers were edited for clarity and length.
Q: Why take this approach of investing in companies that will benefit from spending by millennials?
A: We know the millennial generation is the largest in the U.S. at about 90 million people. Right now their income is at about $2 trillion, but we expect over the next decade for that to quadruple to $8 trillion. There's a massive transfer of wealth that's happening between the Baby Boomers and the millennials. That could be another $40 trillion in assets going to that generation. So, increasingly what we're seeing is that millennials are becoming the driving consumer force behind the U.S. economy.
Q: What are some of the main attributes of millennials as consumers that helped you determine which companies to include in the ETF?
A: When you look at this generation, they're the digital native generation. They were either born into the digital age with computers or mobile phones. They're the most educated generation. They're the most diverse generation. This starts to influence a lot of things when we look at their behavioral characteristics.
The biggest driver is technology. When we look at how companies are added to this fund, the first thing we look at is where millennials are spending money, what types of categories.
Within those categories we look at companies that cater to those unique spending preferences. So, if you were to look at how they spend money on food. They're a very tech-savvy generation, so that means companies that are involved in the online ordering of food or peer review sites about restaurants, those start to boil up to the top.
We have travel reviews and online booking sites, companies involved in selling tickets to concerts and sporting events and online media as well.
Q: What kinds of companies wouldn't make the cut in the ETF?
A: Luxury goods are just not a big part of millennials' consumption. The generation is driven more by experiences than physical goods. And a lot of this plays into the social media theme. So companies that are involved in experiences are favored over luxury goods companies.
Q: In addition to the millennials ETF, you've also rolled out other "thematic" funds based on the demographic trends of people living longer and health and wellness. Why is investing in such funds a better option than going with a broader index fund, for example?
A: Thematic investing is really about looking at macro-level trends and then finding the investments that are poised to benefit from those.
If you look at broad market indexes right now, look at the S&P 500, valuations are near historical highs, and people are starved for growth opportunities. We believe the way to find growth is you need to be more targeted and be more selective on where to find it.
If you owned the Russell 1000, you'd own pretty much everything in the U.S., but it's about overweighing and tilting toward the themes that really have better long-term potential.