Generation Z seems determined to turn the world upside down and is now bringing its disruptive attitudes into the investment world.
This tech-savvy, mobile-first generation is casting off old prejudices and adopting more progressive views on race, gender, work, family, the environment and just about everything else. It was only a matter of time before they turned their attention to investing.
Gen Z is defined as anyone born between 1997 and 2012, and follows on from millennials (1981 to 1996).
The oldest Gen Z-ers are now just entering the workforce and starting to invest, but they aren’t just out to make money. They want to have a positive impact on the world by working for and investing in companies that help the planet, rather than harm it.
The financial crisis has left its mark on Gen Z, which has little faith in the big financial institutions, central bankers and fiat currencies.
They want to take charge of their own financial futures, investing on trading apps and trusting in crypto-currency.
Gen Z is a mighty force, making up almost a third of the global population, according to Bloomberg, slightly more than millennials.
Now Gen Z investors can boast their very own exchange-traded fund (ETF), which launched on December 14 promising to reflect their values.
The Generation Z ETF (GZEN), which trades under the ticker ZGEN, was founded by two teenagers, former child actor Julian Feder, 18, and Eitan Prins-Trachtenberg, 17, although the portfolio managers are old Wall Street hands.
The actively managed fund will target companies “that were born after the internet and whose use, values, disruptiveness and innovativeness align with Generation Z”, according to its website genz-etf.com.
“With 2.5 billion members, Generation Z is an economic powerhouse, projected to be the highest-earning generation in less than 10 years, earning over $40 trillion annually,” the site adds.
The ETF currently invests in 51 stocks in the US. Its top three weightings are social media company Snap, founded in 2007, video game developer Roblox Corporation (2004) and open online course provider Coursera (2012).
ZGEN isn’t the first fund to target specific age groups. The Global X Millennial Consumer ETF (MILN) and the Principal Millennials ETF (GENY) were launched in 2016 and now have $225 million and $104m under management, respectively.
So far, GENZ manages just $5m of assets but these are early days. But is it more than a marketing gimmick?
Vijay Valecha, chief investment officer at Century Financial in Dubai, reckons it has more to offer as research shows Gen Z really does have a different value system and set of expectations to their parents. “They are technologically savvy, prize diversity, the environment and issues like sustainability.”
They have already started to change the investment world, pouring money into environmental, social and governance (ESG) funds, and piling into cryptocurrencies, Mr Valecha says.
“Unlike their parents, they have less faith in traditional financial institutions and are more comfortable using trading apps like Robinhood.”
As baby boomers (1946 to 1964) retire and slowly die, both Gen Z and millennials will receive inheritances totalling tens of trillions of dollars, Mr Valecha says. "It's a big market. Who wouldn't want a piece of that?”
Yet, others are more sceptical. GENZ ETF works best as a sales and marketing tool, John Moore, senior investment manager at wealth manager Brewin Dolphin, says. “Beyond that, it is difficult to see much in the way of merit.”
If Gen Z and millennial investors really do care more about issues such as ethical business, human welfare, sustainability and diversity, then structuring this fund as an ETF doesn’t make sense, Mr Moore says.
With ETFs, you don’t own the underlying assets. "If having a voice and driving change are important, then you need ownership, a vote and a way to provide feedback to management to make that happen.”
Major fund managers like Baillie Gifford and Liontrust build long-term relationships with the businesses and entrepreneurs they engage with. “That gives them some say over corporate governance, culture and communication.”
ETF managers do not usually offer that, Mr Moore says. “We would suggest any young investor take advice before putting their money into such a product. Alternative ideas could include Baillie Gifford Positive Change, Keystone Investment Trust or Liontrust Sustainable Growth.”
ZGEN’s investment remit is narrow and may work against it, says Gemma Boothroyd, an analyst at FinTech stock trading service Freetrade. “By exclusively investing in companies that floated since 1997, it is leaving plenty of good investment prospects on the table for no other reason than to keep its ticker relevant.”
Tech giants Apple and Microsoft are a good example, she says. Gen Zers are among their most enthusiastic customers, yet both stocks are excluded from the ETF's portfolio, as they were launched in the dark and distant years of 1980 and 1986, respectively.
These are two of the most invested-in stocks among Gen Z investors on the Freetrade site, Ms Boothroyd says. “Given the fund’s goal is to invest in companies used by and morally aligned with Gen Z values, this hard line seems misguided.”
Established companies that have adapted to attract younger customers could prove to be more innovative in the longer run. “A company’s ability to pivot and adapt over time meets the fund’s stated objective to invest in companies on the cutting edge of innovation," Ms Boothroyd says.
She is also concerned by the ETF’s fee structure, as the 0.60 per cent total expense ratio is high for an ETF. “Fees aren’t everything, provided performance is good, but it's always important to know the price you are paying.”
Defining the moral compass of a generation is "challenging" and so is filtering for companies that match up, Ms Boothroyd adds. “Young investors are different, so there is plenty of potential here, but defining companies that meet their demands verges on the impossible.”
This may explain why many of ZGEN’s holdings seem weighted in favour of tech, which may not always be a force for moral good but does align with its mission to invest in disruptive and innovative companies.
The downside is that this makes the fund less diversified. “ZGEN could be in for a fall if the market’s current tech sell-off continues.”
It may need to broaden its investment criteria but that would dilute the reason for its existence, Ms Boothroyd adds.
Whatever generation you belong to, one thing doesn't change about investing, Dino Ibric, vice director at investment platform Swissquote MEA, says. “The goal of any investment fund is to generate higher returns than its rivals.”
Plenty of mainstream funds already offer a variety of investment opportunities that Gen Z can identify with, such as innovative tech, robotics and FinTech, as well as impact investing, he says. “Younger investors tend to embrace new advanced technologies contributing to the trend of disruption.”
More funds will follow ZGEN because the target market is so attractive, Mr Ibric predicts. “The younger generation of investors enjoys impressive educational credentials, easy access to information, massive purchasing power and an openness to tech. There’s no doubt more venture capital firms, private equity funds and ETFs will be launched to target this sector.”
The old investment rules apply no matter how old you are. Never put all your eggs in one basket. Invest for the long term. Make sure you understand what you are buying. And don't believe the hype.
