Millennials embraced index funds — and now they're day trading

Millennials’ coming of age has coincided with a rise of passive investing — in 2019 the amount of money invested in inexpensive index funds and ETFs finally overtook actively-managed funds.

The shift towards low-cost, largely passive investing vehicles hasn’t been the work of millennials alone, but they’ve been a big favorite of the generation.

“ETFs serve as the primary investment vehicle for millennials and new investors,” Vanguard wrote in 2019 (around 90% of Vanguard’s ETFs are passive). Across personal finance and investing apps like Betterment, Wealthfront, and Robinhood, passive investing has similarly been the dominant option.

The anti-stock picking approach resonated with many millennials, who seemed to internalize the Jack Bogle exhortation to keep costs low (easy to control) and own the benchmark instead of trying to beat the benchmark (difficult to control).

Until recently.

Last year, Robinhood, the millennial-friendly stock-trading app pushed the entire industry to drop commissions on trades, and for a variety of reasons — no live sports and stimulus checks from the government amid the pandemic, perhaps — retail investors have fired up trading apps like never before, and their behavior is market moving, worrying older generations and breaking market orthodoxy.

Two types of millennials?

The difference between the two approaches is enormous: the Warren Buffett/Jack Bogle approach to simple, long-term investing that harnesses the power of compound interest and the other that’s focused on timing the market and trying to take advantage of run-ups in hot stocks.

It’s possible that there’s a bifurcation of people: those who obey the modern personal finance maxims laid out by Bogle and Buffett and those who hope for more upside than the approximate 7% annualized returns of the S&P 500 by going long Tesla stock (TSLA).

This probably isn’t the case, according to Jessica Rabe, one of the co-founders at DataTrek Research.

“I think index and single-stock investing attract mostly the same audience, but there’s different buckets of personal capital including one for speculation and another for retirement,” she told Yahoo Finance.

The retirement bucket, she said, is the one with index funds, because it’s often the best of the employer-offered 401(k) funds and the plan often comes with a company match.

Mixed group of millennial aged friends discuss investing and cryptocurrency trading at a cafe
(Getty Creative)

“Then when the pandemic hit, largely the same millennials also invested in juicier single stocks, such as tech names, for more leverage when markets swooned,” says Rabe, noting that the stimulus check probably did give them “extra money to play with.”

Millennials (born between 1980 and 1995) have gotten into the market because they know what happens after a big crash, Rabe says. Much has been made of how the financial downturn of 2008 affected millennials, but less about how the huge rally post-2008 shaped the generation’s view as well.

“We learned a valuable lesson: when stocks crater, there’s a decent opportunity to make money,” Rabe wrote in a recent newsletter. “They know how [a crash] ends – with a rally – and that’s exactly what happened in 2020.”

Millennials could have bought the dip with an index fund, but Rabe thinks the single-stock activity came from an edge millennials had by being tech savvy and simply buying what they know.

Everyone, of course, may have their own motives. Some millennials might want to take some of their nest egg and put it on the table, exposing them to far higher upside than the S&P 500, even though they know it’s riskier. Some might want to cosplay Bobby Axlerod. Some, as Yahoo Finance’s Myles Udland says, might just want to have some fun after learning what the right thing to do is.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.