ETFs are becoming increasingly popular among Gen Z and millennial retail investors, according to a report. Experts advise caution when investing in these funds.

• According to a report by Nasdaq, the two most likely generational groups to have exchange-traded funds in their retirement accounts are Millennials and Gen Zers, with 81% and 75% respectively.
• Alison Hennessy, head of exchange traded product listings at Nasdaq, stated that the increase in retail investors investing in ETFs is not going to stop.
• Here are two things investors starting out should keep in mind.

At the age of 18, John Healy started investing in exchange-traded funds.

Healy, who worked as a security guard in a beach club, earned an hourly wage of "$12 a pop" and relied on internet message boards to determine what to buy or sell.

Currently, Healy is a 25-year-old law clerk in New York City who has a financial planner directing his investment choices.

His interest in baskets of securities that closely track an index has not changed.

Healy stated that ETFs remain a tool for him to participate in the stock market.

Exchange-traded funds are being tapped into by young investors at high rates.

ETF holdings in retirement accounts are most commonly found among millennials and Gen Zers, with rates of 81% and 75% respectively, according to an annual report by Nasdaq.

In March, a survey of 2,000 U.S. retail ETF investors was conducted. The report identifies millennials as individuals born between 1981 and 1996, while Gen Z is defined as those born from 1997 to 2021.

Since Nasdaq has been conducting the report, the trend has been growing for the past three years, according to Alison Hennessy, head of exchange-traded product listings at Nasdaq.

"The trend of retail investors investing in ETFs is unlikely to stop," she stated.

Why ETFs have gained popularity

This year, ETF.com reports that U.S. ETFs experienced a record-breaking $900 billion in inflows and about 600 ETF launches.

Experts say that the investment vehicle has been gaining popularity among investors due to its lower costs, tax benefits, and accessibility compared to mutual funds.

According to Hennessy, the ease of buying and selling ETFs directly on a brokerage account is what primarily attracts investors to this structure.

The same can't be said for a mutual fund, experts say.

As an active investor, you can execute intra-day trades with an ETF, while a mutual fund will only process your buy or sell order after market close, according to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

ETFs typically have lower associated fees compared to mutual funds and other index funds.

According to Morningstar, index ETFs have an average annual fee of 0.44%, which is half the 0.88% fee for index mutual funds. On the other hand, actively managed ETFs have an average fee of 0.63%, which is lower than the 1.02% fee for actively managed mutual funds.

And ETFs do not typically trigger capital gains taxes, Lucas said.

""Younger investors know exactly what they're getting with no surprises, making them tax-efficient," he said."

Healy was motivated to start investing as a teenager due to his parents' influence on him, who emphasized the importance of saving and investing his money, according to Healy.

He stated that since he is now living independently, he must manage his own finances and be concerned about them.

Experts advise Gen Z investors starting out to consider two key factors.

1. Research what your exposure could be

Consider the transparency of the more than 3,800 U.S.-listed ETFs available in the market, said Hennessy.

She stated that the majority of ETFs are disclosing their portfolio holdings.

Check the ETF issuer's website for information on sectors, companies, industries, and risks you may be exposed to, advised Hennessy.

You may want to know which countries or classifications the fund concentrates on.

Hennessy stated that you possess the capability to closely examine the specific assets within the fund.

2. Take note of 'wash sale rules'

Be mindful about so-called "wash sale rules," Lucas said.

If you repurchase the same or an identical security within a 30-day window before or after the sale, you cannot claim a loss, as per IRS guidelines.

If you buy back or a similar ETF within the time period after selling it at a loss, you cannot claim the tax loss.

Experts advise caution when handling wash sales with ETFs, as it may be easier to bypass rules compared to mutual funds.

"That loss you would have taken is added to your cost basis, potentially to be taken later," Lucas said.