Most grandparents have a special bond with their grandchildren. They would like to see the young get on the path to becoming healthy, happy, and independent adults. We believe grandparents can indeed leave much longer-lasting benefits than a mountain of toys.
One of the simple steps grandparents can take to empower the next generation is by showing them the importance of saving and investing early on. If you’d like to give your grandchild a present that won’t break, or become boring, how about investing in an exchange-traded fund (ETF)? Today we'll discuss a low-cost exchange-traded fund that may be appropriate for grandparents to invest for their grandkids.
The Miracle Of Compound Interest
Financial literacy is about learning to budget, save, invest and generally make informed financial decisions. While your grandkids might still be too young to appreciate complicated investment concepts, it is never too early to start talking about the importance of interest rates and the power of compounding. Compound interest has a snowball effect on personal savings. As time goes on, interest leads to more money, over and over again.
For example, you can introduce grandchildren to Rule of 72, which would help them calculate how quickly an investment doubles with the impact of compounding. They’d simply take the number 72 and divide it by the percent annual return.
Let’s say an investment is expected to return 10% a year. So, 72/10 = 7.2. Or it would take about seven years for the investment to double.
Time Is On The Side Of Grandchildren
The concepts of compound interest and time go hand in hand. An investment needs time to grow and when given enough time, even modest savings add up to substantial amounts.
Let us assume you have a 10-year-old grandchild. You would like to invest $5,000 in a fund now, with an additional $3,600 contribution annually at the end of each year. The time horizon is 15 years. The annual return is 8%, compounded once a year. At the end of 15 years, the total amount saved becomes around $113,608.
Now, let's assume the young adult, who is 25 years old, takes over the fund management and decides to invest $1,000 a year in the fund for the next 35 years. The annual return stays at 8%. At the end of this timeframe, the total would now stand at $1,852,050.
If the grandchild were to contribute $2,000 (as opposed to $1,000), the total at the end of 35 years would become $2,024,367.
Teach kids and young adults that the more regularly they invest and the longer they keep it invested, the faster they will reach their financial targets.
With all that in mind, here is an ETF that may be suitable as long-term investment.
iShares Core S&P Total US Stock Market ETF
Current Price: $73.09
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52-Week Range: $58.52 - $76.57
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Dividend Yield: 2.17%
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Expense Ratio: 0.03% per year, or $3 on a $10,000 investment
The iShares Core S&P Total US Stock Market ETF (NYSE:ITOT) tracks the S&P Total Market index and thus gives exposure to the total US stock market, ranging from some of the smallest to the largest companies.
It currently has 3,567 holdings, meaning the fund offers broad diversification at a very low cost. The top ten stocks make up approximately 25% of total net assets, which stand close to $26.5 billion. ITOT's top three companies are Apple (NASDAQ:AAPL) (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN) (NASDAQ:AMZN).
The top three sectors (by weighting) of the fund are Information Technology, Health Care, and Consumer Discretionary.
Year-to-date, the fund is roughly flat. Yet that result does not include the dividend payments. Moreover, the metric shows only half the story for the year.
On March 23, it hit a 52-week low at $48.52. Since then, it is up about 50%. Put another way, $1,000 invested in ITOT in early spring would now be $1,500.
However, as long-term investors, grandparents would not need to worry about short-term volatility in the fund's value. $10,000 invested in ITOT a decade ago would now stand around $35,000.
Bottom Line
Grandparents can help their grandkids get off to a great start in life with a carefully chosen investment. A low-cost exchange-traded fund may help in that journey.
Other ETFs that grandparents may consider investing for their grandkids could include the SPDR Portfolio Large Cap ETF (NYSE:SPLG), the Vanguard Total Stock Market ETF (NYSE:VTI), and Schwab US Large-Cap Value ETF (NYSE:SCHV).
Most countries also have tax-friendly ways to encourage saving and investing. Grandparents may also want to check with a financial advisor.