Aug 2021

There is tons of content out in the web on ETFs and their growth in last 2 decades. A great infographic to ETFs can be found here.

ETFs ( which stand for Exchange traded funds) are a great way for investors to partake in the upside of US economy without undue risk of holding single name stocks which can be volatile and have large drawdowns.

Top ETFs which every portfolio should consider holding are below. I would allocate roughly 70% of your stock portfolio to SPY, QQQ and DIA with higher concentration on SPY ( I would say atleast 50-60% of that 70% allocation). This is purely because the index will consume every good company, weed out the bad ones and protect you from over thinking and analyzing every business cycle, every correction and worrying about timing each market top and bottom. More quotes provided in the end of the blog.

· SPY – S&P Index

· DIA – Dow Jones Index

· QQQ – Nasdaq Top 100 names

· IWF – Russel 1000 Growth

· IWM – Russel 2000 small cap index

· VGT – Vanguard Growth Technology

· IHI – I-Share US Medical Device makers

· ITA – Aerospace and defense

· MGK – Vanguard Mega Cap

A good way to invest is over time and using dollar cost averaging much like your 401k account. Remember, every great stock cannot keep going up , every great company cannot stay at the top forever, hence if you don’t have the time to research and buy single name stocks, indexing will be your best friend over time.

There have a lot of new ETFs getting a lot of attention such the one’s from ARK , thanks to Cathy Woods strong conviction on growth stocks. I encourage you to look at ARKW, ARKF, ARKG. I would prefer you hold a few growth stocks found in these ETFs’ rather than these concentrated ETFs itself offered by ARK companies.

WHAT ETFs you should avoid at all costs -

· Avoid low liquidity ETFs with high intraday bid/offer. You will loose money when market corrects in such ETFs and many of them are poorly constructed to withstand downturns

· Avoid, low AUM ETFs. A good rule of thumb is < $ 1 Billion

· Avoid ETFs which track commodity’s, Futures prices and trade in any sort of derivatives as their strategy

· Avoid ETNs or Exchange Traded Notes which are liability's of Financial Institutions ( Refer the short VIX ETN fiasco from Credit Susie)

· Avoid leverage ETF as a long term buy and hold stratergy. They are good for short term trading and hence allocation should be kept to less then 3 to 5% of account size.

One Tip which can make you serious money $$

If the AUM is slowly going up each Qtr. , take a look at the industry and sector its investing to decide if that’s a good fit. For example, 2020/2021 saw the themes of clean energy, Autonomous driving , FinTech etc. as the main momentum drivers and hence partaking in rally via Tickers such as ICLN, QCLN was a great way to play that theme. Similarly ETF was JETS ( Airline stocks were beaten up so bad after W. Buffet sold them post COVID, JETS was a momentum ETF and a retail favorite)

Now some famous Quotes on indexing

“If the data do not prove that indexing wins, well, the data are wrong.”

John C. Bogle

“[With] closet indexing....you're paying a manager a fortune and he has 85% of his assets invested parallel to the indexes. If you have such a system, you're being played for a sucker.” Charlie Munger

“Nobody wants to be passive; indexing is not passive - much more goes into indexing than watching a stock become the next buggy whip.” Charles R. Schwab

While it is probably a poor idea to own actively managed funds in general, it is truly a terrible idea to own them in taxable accounts... taxes are a drag on performance of up to 4 percentage points each year... many index funds allow your capital gains to grow largely undisturbed until you sell... For the taxable investor, indexing means never having to say you're sorry. William J. Bernstein

“The simple index fund solution has been adopted as a cornerstone of investment strategy for many of the nation's pension plans operated by our giant corporations and state and local governments. Indexing is also the predominant strategy for the largest of them all, the retirement plan for federal government employees, the Federal Thrift Savings Plan (TSP). The plan has been a remarkable success, and now holds some $173 billion of assets for the benefit of our public servants and members of armed services.”

David F. Swensen