This week's Dumb Investment of the Week is the newly launched the Global X Millennials Thematic ETF (NASDAQ:MILN). As you might guess from the name the goal of the ETF is to invest in companies that will benefit from the tastes and spending preferences of the millennial generation (those born 1980 to 2000). The reason we think this is a dumb investment relates to the cost and the confusing strategy of the ETF.
Active or Passive?
The Millennials ETF tracks the Indxx Millennials Thematic Index and the net expense ratio for the fund is 0.68%. The expense ratio is high for a fund that tracks an index except that the index the fund tracks isn't an index in the way traditional investors might think of an index.
When someone uses the term index or index fund most of us typically think of some passive index. Typically, when we use that term, we are referring to popular cap-weighted indexes such as the S&P 500 for large U.S. companies, the FTSE 100 for large U.K. companies, MSCI ACWI Index for every equity in the world, or the Barclays U.S. Aggregate Bond Index that tracks the total U.S. bond market. We could even extend it to other easy to construct indexes such as various sector indexes, equal cap-weighted indexes, or indexes of dividend paying stocks. These indexes are typically simple to populate because they use rules-based formulas. The MSCI ACWI is easy, just take every single equity, weight it by market cap and you are done. Equal weight indexes are simple as well. Take every single stock in the S&P 500 and weight it by 0.2%. Even factor-based indexes aren't too complicated to assemble. As such, most index funds have low costs. Heck, if you go through Charles Schwab some are even free!
The index the Millennials ETF tracks has much more in common with traditional actively managed funds. There is a group of investment professionals sitting around analyzing companies and attempting to determine which ones will benefit from the millennial generation. You would have to assume they are doing this because they believe there is value to the process and that the stocks they select for inclusion in the index will outperform some broad market benchmark on a risk-adjusted basis. It's really difficult to see any fundamental differences between what Indxx, LLC (the company that manages the index) is doing and what traditional active managers are doing. They are both attempting to pick stocks that they believe will have high future returns.
In the context of a traditional index fund, the expense ratio of 0.68% for MILN is very high. However, in the context of an actively managed fund, which we believe MILN is an expense ratio of 0.68% isn't too bad (provided you're not also paying an advisor 1% to buy it). So why do we view the cost as a mark against MILN? Well, if you say something is an index fund, it ought to have a strategy and expenses similar to other index funds. If Global X had just called the fund an active ETF with a strategy to invest in millennial-centric stocks, we'd be OK with it. Well, except for our next point.
The Millennial Generation
The Millennial ETF makes some excellent points about why you'd want to invest in companies that benefit from millennial preferences. With about 90M members, the millennial generation is the United States' largest age cohort. The first part of the generation is right on the cusp of entering their prime earning years. For men, peak earnings year usually come in their late 40s to early 50s. Therefore, right now millennials are beginning their sharp upward arc towards their peak earning years and as such, the generation will soon become the dominant consumer force in the country. Next, millennials are expected to be on the receiving end of over $40T of wealth transferred from older generations during the next decade. All of this information is well known and we don't have any arguments with the notion millennials will soon be driving the economy in the United States.
Astute readers may have picked up on something. If millennials are going to be the driving force of the economy, then millennials will be the economy and the economy will be millennials. It's a tautology. According to the prospectus, it appears the fund will be following the generation across its entire life cycle. So this raises the question of whether or not the fund is really doing anything differently than any other growth fund out there? Is it plausible to believe, say, the managers of the American Funds The Growth Fund of America (MUTF:AGTHX) are just sitting there not paying attention to what the largest generation in America will be doing and what their spending habits are? We think not. Both funds' largest holding is Amazon (NASDAQ:AMZN) and they have many overlapping holdings in their top 25 including Home Depot (NYSE:HD), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL).
To us, the fund looks like just another actively managed growth fund (the fund has a P/E of 26.16 and forward P/E of 24 so it meets the traditional criteria of a growth fund). If you want to invest in a "growth" fund, great (our personal opinion is growth and value are intertwined). Why not invest with managers that can pick undervalued and growing companies no matter what "theme" they fit with. Why hire an active manager and then tell them they can only buy stocks that fit a certain theme?
If you invest in MILN, you are essentially paying 0.68% per year for an actively managed growth fund and then arbitrarily handcuffing the managers you picked. For that reason, The Global X Millennial Thematic ETF is our Dumb Investment of the Week.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.