Last Updated on 2021-10-12
What is an ETF?
ETF stands for exchange-traded fund. They are very similar to mutual funds, except ETFs are traded on stock exchanges which means they can be bought and sold throughout the day.
An ETF is a basket of securities that you can buy or sell through a brokerage firm. It holds all kinds of assets such as stocks, bonds, currencies, gold, silver, or even cryptocurrency. Nowadays, some investment management companies even had filed with the Securities and Exchange Commission (SEC) for a Bitcoin(BTC) ETF.
How does ETF work?
An ETF divides its ownership into shares that can be traded on stock exchanges. The price of ETF goes up and down just like stocks base on supply and demand. The ETF provider designs a fund that contains a basket of whatever it was created for. Index, stocks, bonds, real estate, or precious metal, you name it.
How it works –
- The ETF provider creates a collection of assets, including stocks, precious metal, bonds, real estate, commodities or currencies. Then a unique ticker will be given to it. Famous ticker such as VOO, SPY, VT, VTI, VXUS, BND, BNDX, and BNDW.
- Investor can buy a share of that ticker, just like buying a share of AAPL.
- Trades are made in the stock exchange such as NYSE, Nasdaq etc.
Types of ETFs
An index fund is not to invest through the judgment of the fund manager, but to buy in according to a certain index rule. An index fund automatically buys a basket of securities according to the chosen index. No fund manager’s subjective judgment was involved.
Take SPDR S&P 500 ETF TRUST (SPY) for example. It is designed to track the S&P 500 stock market index. This approach allows ETFs to reduce management costs, and the expense ratio can be drastically reduced, but the performance is even better than funds with fund managers actively choosing stocks.
Fun fact : S&P 500 Index ETF was involved in Warren Buffett’s bet with Hedge Fund !?
In 2008, Protégé Partners LLC accepted Buffett’s a million-dollar bet which is that the hedge funds’ performances couldn’t justify its extremely expensive fees. The Protégé co-founder, who left in the fund in 2015, admitted publicly that he had lost the bet. He wrote, “for all intents and purposes, the game is over. I lost.”
Buffett successfully proved that including fees, costs and expenses, an S&P 500 index fund would outperform so-called hedge funds that are actively investing over 10 years period of time.
Stock ETFs & Bond ETFs
A stock ETF tracks a set of stocks that may focus on a particular sector or industry. It diversifies investor’s portfolios with low cost and high liquidity. The purpose of stock ETFs is to help investors to grip a basket of stocks that have the potential for growth, no matter they are high performers and new entrants.
On the other hand, a bond ETF provides fixed income to the investor. A bond ETF literally means that it only invests in bonds. It owns a portfolio of bonds and uses different strategies for investment. There are so many aspects from U.S. Treasuries to high yields bonds, holding between long-term and short-term. You name it.
Some examples as below –
We all know that inflation is making the bills(any currency) on our hands thinner and thinner every single day. In the old days, people think that GOLD is the best commodity to protect your asset against inflation.
Let’s take a look at Vanguard Materials ETF (VAW)
VAW tracks the performance of an index in the materials sector. It is passively managed. Use a full-replication strategy when possible and a sampling strategy if there are regulatory constraints.
Currency ETFs track a single currency or a basket of currencies. It allows investors to diversify their investments and hedge against volatility in the foreign exchange market. It is often used by importers and exporters due to the big risks they are facing. Currency risk is prone to volatility because the value of a currency is usually affected by the economic, political situations and interest rates.
But why didn’t we hear people talking about Currency ETFs? It is because there are so many other alternatives such as exchanging foreign currency directly, Money Market Fund, Currency Pair …etc. Therefore, Currency ETFs aren’t so popular among us retail investors.
They are also known as short ETFs which means it profits from a decline in the value of assets. Sounds risky, right? YES, they are very risky investments. Therefore, they aren’t designed for everyone. Some professional traders use it to hedge against prices that go down in other positions.
I would never suggest you invest in Inverse ETFs. But if you’re really interested in short ETFs, there are 2 things that you should know :
1. Inverse ETFs usually have higher fees.
2. Inverse ETFs reset daily. So buy-and-hold strategy is definitely a terrible idea.
People like to speculate on the stock market. Companies like Proshares and Direxion provide double-leveraged and triple-leveraged ETFs. These ETFs use financial derivatives and debt to amplify the result of an underlying index. Just by understanding the word “Leveraged” literally, you would instantly know that this is risky for professional traders and it’s not meant for those with a low-risk tolerance and those who use buy-and-hold strategy. It also has the same rule of Inverse ETFs like higher fees and it resets daily.
Let’s say, I’ve bought 1 share of TQQQ(ProShares UltraPro QQQ) which is a triple-leveraged ETF to the underlying Nasdaq-100 Index. If the Nasdaq-100 Index climbs 1% in a single day, my 1 share of TQQQ should increase by 3%. Due to the daily reset feature, I shouldn’t be holding that 1 share longer than a day. Otherwise, the longer I’m holding that 1 share, the more significantly it would differ from the target return.
Thematic / Industrials Sector ETFs
By reading the title out loud, you would understand that Thematic / Industrials Sector ETF is a basket of stocks and securities that invest in a particular industry or sector.
Never Buy Stock That You Don’t UnderstandWarren Buffett
We, humans, tend to buy the stocks that we are familiar with. For example, if you are a Pharmacist, you would feel more comfortable buying Roche Holding AG (RHHBY) due to the professional knowledge and the sale operations on the daily basis. You know the fact that people are buying and using the drugs the company produces. The rule applies to the sector ETFs as well.
Take XLP (Consumer Staples Select Sector SPDR Fund) for example, it has 97.92% investment in Consumer Defensive sector.
XLP Top Holdings
Fund Top Holdings as of Sep 02 2021
|Procter & Gamble Company||14,713,969||15.98%|
|Costco Wholesale Corporation||1,519,178||5.28%|
|Philip Morris International Inc.||5,868,718||4.68%|
|Altria Group Inc||11,657,194||4.49%|
|Mondelez International Inc. Class A||9,094,775||4.25%|
|Estee Lauder Companies Inc. Class A||1,631,312||4.23%|
Index Top Holdings as of Sep 02 2021
|Procter & Gamble Company||15.99%|
|Costco Wholesale Corporation||5.29%|
|Philip Morris International Inc.||4.68%|
|Altria Group Inc||4.49%|
|Mondelez International Inc. Class A||4.25%|
|Estee Lauder Companies Inc. Class A||4.24%|
You can see that in the portfolio there are many good international companies that provide their goods and services globally such as Procter & Gamble Company, Coca-Cola, Pepsi, Costco, Altria Group and Colgate-Palmolive Company. What’s the beauty of it? People are using their products every day.
Try to recall a day in your life –
When you wake up in the morning, brush your teeth with Colgate toothpaste.
Shave with Gillette razor.
Feed your pet with Hill’s.
Go to McDonald’s and have a can of Coke.
Cook dinner with materials that were purchased from Costco.
Sectors ETFs Chart ( date: 2021.09.06 )
|XLE||Energy Select Sector SPDR Fund||48.62||-0.28||-0.573||19,058,306||48.39||49.16||48.9|
|XLF||Financial Select Sector SPDR Fund||38.07||-0.24||-0.627||32,302,169||37.98||38.32||38.31|
|XLU||Utilities Select Sector SPDR Fund||69.49||-0.58||-0.828||9,416,689||69.32||69.96||70.07|
|XLI||Industrial Select Sector SPDR Fund||104.59||-0.64||-0.608||9,731,021||104.52||105.14||105.23|
|GDX||VanEck Gold Miners ETF||33.28||+0.78||+2.4||26,479,269||32.87||33.52||32.5|
|XLK||Technology Select Sector SPDR Fund||159.36||+0.63||+0.4||10,093,908||158.49||159.78||158.73|
|XLV||Health Care Select Sector SPDR Fund||136.85||+0.15||+0.11||5,569,732||135.91||137.045||136.7|
|XLY||Consumer Discretionary Select Sector SPDR Fund||183.52||-0.11||-0.06||3,441,417||182.36||183.57||183.63|
|XLP||Consumer Staples Select Sector SPDR Fund||72.83||-0.09||-0.123||5,999,123||72.49||72.935||72.92|
|XLB||Materials Select Sector SPDR Fund||85.37||-0.57||-0.663||6,336,517||85.35||86.1||85.94|
|XOP||Spdr S&P Oil & Gas Exploration & Production Etf||84.52||-0.24||-0.283||4,587,782||83.82||85.64||84.76|
|IYR||iShares U.S. Real Estate ETF||111.27||+0.03||+0.03||11,136,754||110.03||111.44||111.24|
|XHB||Spdr S&P Homebuilders Etf||78.34||-0.54||-0.685||1,615,507||77.88||78.77||78.88|
|ITB||iShares U.S. Home Construction ETF||73||-0.83||-1.124||1,780,326||72.46||73.8||73.83|
|VNQ||Vanguard Real Estate Index Fund ETF Shares||110.92||+0.02||+0.02||4,303,043||109.7||111.06||110.9|
|GDXJ||VanEck Junior Gold Miners ETF||43.98||+1.36||+3.19||7,980,079||43.36||44.39||42.62|
|IYE||iShares U.S. Energy ETF||26.43||-0.13||-0.49||1,185,690||26.31||26.7||26.56|
|OIH||VanEck Oil Services ETF||186.76||-3.07||-1.617||579,276||186.131||191.8||189.83|
|XME||SPDR S&P Metals & Mining ETF||44.97||+0.1||+0.22||2,812,726||44.7||45.44||44.87|
|XRT||Spdr S&P Retail Etf||95.64||-0.33||-0.344||1,351,869||95.2||96.2||95.97|
|SMH||VanEck Semiconductor ETF||273.29||+2.22||+0.82||1,792,893||270.31||274.24||271.07|
|IBB||iShares Biotechnology ETF||175.81||-0.19||-0.108||1,231,559||174.32||175.98||176|
|KBE||SPDR S&P Bank ETF||51.59||-0.19||-0.367||2,847,280||51.37||52.06||51.78|
|KRE||SPDR S&P Regional Banking ETF||65.18||-0.2||-0.306||7,592,966||64.91||65.92||65.38|
|XTL||SPDR S&P Telecom ETF||102.274||-0.552||-0.537||5,091||102.049||102.78||102.826|
Lastly, I just want to remind you that sector ETFs are focusing on a specific area. Normally, the risk is higher than average. It is also the reason why I wouldn’t invest more than 20% of my portfolio and asset allocation. But it can fulfill your needs of choosing your own particular sectors.
Popular Stock and Bond ETFs
VT ( Vanguard Total World Stock ETF ) :
Vanguard Total World Stock ETF seeks to track the investment performance of the FTSE Global All Cap Index, a free-float-adjusted, market-capitalization-weighted index designed to measure the market performance of large-, mid-, and small-capitalization stocks of companies located around the world. The index includes approximately 7,400 stocks of companies located in 47 countries, including both developed and emerging markets.https://investor.vanguard.com/etf/profile/VT
It is the ultimately laziest method to invest in the whole world stock market. VT tracks the benchmark indexes and the stock’s performance around the globe. It contains hundreds of thousands of stocks that are Geographically and Sectorally well-distributed across the United States, Canada, United Kingdom, Japan, Europe, Asia, and Financial Services, Healthcare, Technology, Consumer Cyclical, and Industrials, etc.
VTI ( Vanguard Total Stock Market ETF ) :
Vanguard Total Stock Market ETF seeks to track the investment performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq.https://investor.vanguard.com/etf/profile/VTI
If you believe in the U.S.A. technology and brands, you wouldn’t miss out to invest in this one. Especially, when you want to control the precise percentage of the US market. Not letting VT do the work for you. This is a convenient ETF allowing you to rebalance your portfolio (Asset Allocation) every year.
VXUS ( Vanguard Total International Stock ETF ) :
Vanguard Total International Stock ETF seeks to track the investment performance of the FTSE Global All Cap ex US Index, an index designed to measure equity market performance in developed and emerging markets, excluding the United States.https://investor.vanguard.com/etf/profile/VXUS
Usually, VXUS goes together with VTI because we can control the percentage we wanted and easily rebalance its numbers every year to achieve the balance of risk and ROI. As of 07/31/2021, VXUS has 25% Emerging Markets, 40.4% Europe, 27.2% Pacific, 0.4% Middle East, 6.8% North America and 0.2% Others. History is a good teacher, we learned that don’t just bet on any single market because we’re ordinary people, not George Soros. Put effort into our professional careers and grips the fruit of economic growth by investing in ETFs is a good way to our F.I.R.E. goal.
VEA ( Vanguard FTSE Developed Markets ETF ) :
Vanguard FTSE Developed Markets ETF seeks to track the performance of the FTSE Developed All Cap ex-US Index. Vanguard FTSE Developed Markets ETF is an exchange-traded share class of Vanguard Developed Markets Index Fund. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.https://investor.vanguard.com/etf/profile/VEA
VEA is focusing on developed countries excluding the US. As of 07/31/2021, the regional top 8 holdings include 20.6% Japan, 13.0% United Kingdom, 9.1% Canada, 8.4% France, 7.7% Switzerland, 7.5% Germany, 6.4% Australia and 5.2% Korea. Also, as you can see the top 10 holdings companies below, they are all very famous companies that we may use their services and products on a daily basis. Such as Samsung, Nestle, ASML(provides equipment to TSMC), Roche, Toyota and AstraZeneca.
VWO ( Vanguard FTSE Emerging Markets ETF ) :
Vanguard FTSE Emerging Markets ETF seeks to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. The FTSE Emerging Markets All Cap China A Inclusion Index is a market-capitalization-weighted index that is made up of approximately 3,550 common stocks of large-, mid-, and small-cap companies located in emerging markets around the world.https://investor.vanguard.com/etf/profile/portfolio/vwo
This is the particular ETF that I wouldn’t invest in due to the reason that China is having a Trade War with the United States.
BND ( Vanguard Total Bond Market ETF ) :
Vanguard Total Bond Market ETF seeks to track the investment performance of the Bloomberg U.S. Aggregate Float Adjusted Index, an unmanaged benchmark representing the broad, investment-grade U.S. bond market. The fund invests in taxable investment-grade corporate, U.S. Treasury, mortgage-backed, and asset-backed securities with short, intermediate, and long maturities in excess of one year, resulting in a portfolio of intermediate duration.https://investor.vanguard.com/etf/profile/BND
BNDX ( Vanguard Total International Bond ETF ) :
Vanguard Total International Bond ETF seeks to track the investment performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). This index provides a broad-based measure of the global, investment-grade, fixed-rate debt markets. The index includes government, government agency, corporate, and securitized non-U.S. investment-grade fixed income investments, all issued in currencies other than the U.S. dollar and with maturities of more than one year.https://investor.vanguard.com/etf/profile/portfolio/bndx
BNDW ( Vanguard Total World Bond ETF ) :
Vanguard Total World Bond ETF seeks to track the investment performance of the Bloomberg Global Aggregate Float Adjusted Composite Index (Index), which is designed to track the market capitalized weights of the global investment-grade bond market and is comprised of the Bloomberg U.S. Aggregate Float Adjusted Index and the Bloomberg Aggregate ex- USD Float Adjusted RIC Capped Index (USD Hedged).https://investor.vanguard.com/etf/profile/portfolio/bndw
BNDW ETF can be concluded in a sentence – It is a combination of BND and BNDX. Meaning BNDW is the ETF of ETFs.
IEI ( iShares 3-7 Year Treasury Bond ETF ) :
The iShares 3-7 Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities between three and seven years.https://www.ishares.com/us/products/239455/ishares-37-year-treasury-bond-etf
IEF ( iShares 7-10 Year Treasury Bond ETF ) :
The iShares 7-10 Year Treasury Bond ETF (IEF) seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities between seven and ten years.https://www.ishares.com/us/products/239456/ishares-710-year-treasury-bond-etf
TLT ( iShares 20+ Year Treasury Bond ETF ) :
The iShares 20+ Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.https://www.ishares.com/us/products/239454/ishares-20-year-treasury-bond-etf
DATAROMA collects and organizes all the Superinvestor Portfolio Stats. Who are these superstar investors? Bill Ackman – Pershing Square Capital Management, Warren Buffett – Berkshire Hathaway, Howard Marks – Oaktree Capital Management, Charlie Munger – Daily Journal Corp. and check out the website for more information.
The most powerful tool of FINVIZ – THE SCREENER.
You can set up a lot of conditions such as :
1. Stock Exchange – NYSE / NASDAQ
2. Market Cap.
3. Index – S&P 500 / DJIA
4. Dividend Yield
How to start investing in ETF?
It very simple to start with legit and decent brokerage firm which I listed below. All of them are under the supervision of SEC and qualified with SIPC and FINRA. Be rest assured that your investment is protected by the law of the United States.
Disclosure of Interests : The FIRSTRADE link above is my affiliate link. If you find my website is helpful, you could use the link as an encouragement to me. By using this link, you will not receive any difference in services and fees.