Ah, to be young again. Investors in their 20s have one of the most important luxuries: time. The longer an investor’s time horizon is, the more risk they can indulge and with that comes the potential for elevated rewards.
Then there’s the matter of compounding via dividend reinvestment. The longer market participants put the power of compounding to work and reinvest, the better their long-term outcomes are likely to be. Indeed, in financial markets, time is perhaps the only commodity more valuable than capital.
“Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together,” according to Charles Schwab research. “The higher your starting amount and the higher your investment return, the faster your savings compound. And over time, it can seriously add up. Saving early and often can put the power of compound growth in your favor by putting your money to work—so you don’t have to!”
Bottom line: Younger investors should capitalize on every benefit of buying, well, young and leverage time to their benefit. The following exchange traded funds can help with objective.
ARK Autonomous Technology & Robotics ETF (ARKQ)
Investors across all age groups are hearing plenty about the artificial intelligence (AI) movement and it’s one with myriad investment implications. The ARK Autonomous Technology & Robotics ETF (ARKQ) stands as one of the more credible options, particular for younger investments. After all, ARK Investment Management CEO and CIO Cathie Wood often says it can five years or more for disruptive technologies to mature.
Up more than 19% year-to-date, the actively managed ARKQ is already reflecting some of the bullish expectations ascribed to AI investing, but with generative AI – the broadest application of this technology – still in its infancy, some market observers are comparing this to an “iPhone moment,” indicating investors with the benefit of time could wring significant perks from being patient with ARKQ.
“But I do think the iPhone analogy is apt, for two reasons. One, what we’re talking about today with generative AI is more foundational technologies,” noted Morgan Stanley’s Keith Weiss. “You can almost think about that as the operating system on the mobile phone like the iOS operating system. And what we’ve heard all week long is companies are really seeing opportunity to create new apps on top of that operating system, new use cases for this generative AI. The other reason why this is such an apt analogy is, like the iPhone, this is really capturing the imagination of not just technology executives, not just investors like you and I, but everyday people.”
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) is an obvious departure from the aforementioned ARKQ, but as noted above, the power of compounding/reinvesting dividends is undeniable and represents a significant portion of a portfolio’s long-term returns.
For its part, DGRW doesn’t explicitly focus on the length of time over which member firms boosted payouts, but many of the ETF’s holdings have enviable histories of annually boosting dividends. The positives from dividend growth investing are something to behold and it’s a favorite strategy of none other than Warren Buffett.
“The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie (Munger) and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow,” he wrote in Berkshire Hathaway’s most recent letter to investors. “American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.”
KraneShares China CSI Internet ETF (KWEB)
With the power of time on their sides, younger investors can ride out the volatility that’s often associated with emerging markets equities. That’s a plus because as the KraneShares China CSI Internet ETF (KWEB) proves, there are times when Chinese equities can be tumultuous.
Younger investors shouldn’t let that volatility belie what’s a tremendous opportunity set, particularly in the internet space. China’s consumer internet space arguably has ground to make up against the U.S., but the good news many KWEB components trade at discounts relative to equivalent domestic firms. Then there’s the matter of growth, which makes KWEB an interesting consideration for younger investors.
“China’s growth surge will be tempered by falling demand for its exports as U.S. spending shifts away from goods. We don’t expect the level of economic activity in China to return to its pre-Covid trend, even as domestic activity restarts,” noted BlackRock. “China replacing the U.S. as the driver of global growth underpins our preference for emerging market equities, including Chinese equities, over DM peers.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
