How To Research An ETF - InvestingChannel

How To Research An ETF

Proprietary Data Insights

Top Large Cap ETF Searches This Month

#1SPDR S&P 500 ETF266,609
#2Invesco QQQ149,268
#3Vanguard S&P 500 ETF38,544
#4Schwab US Dividend Equity ETF23,326
#5Vanguard Total Stock Market ETF16,021
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How To Research An ETF

In Thursday’s Juice about how to come up with an extra $500 a month, we said we’d tell you how to invest $500 a month on Monday. 

Today’s Monday and we’re going to put that installment off for a few days. 

Why? Because we got slightly ahead ourselves. Because we’ll be ETF heavy with that $500, we thought it made sense to introduce and revisit some key ETF basics. Not the same basics every single personal finance and investing platform spews. But actually useful basics. 

You know to go for low expense ratios. You know to stay away from leveraged ETFs. You know that your best bet might be to start with the most popular broad market ETFs, the SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ)

We’re all over that like flies on …

Let’s go where the rubber meets the road. 

While ETF investing takes the guesswork out of investing, primarily because you’re not left to pick individual stocks. A difficult task for many investors. You are still — to some extent — picking stocks, even though it’s a bunch of stocks in a basket. Particularly when you veer from SPY and QQQ. You can get in a lot of trouble or waste a lot of time for little, if any additional return when you stray too far from these two ETF powerhouses. 

However, if you know what you’re doing — and why you’re doing it — it can make sense, even if it doesn’t make you more money. It might just make you feel better about where you’re putting your money. And this psychological component of investing is important. 

For example, maybe you’re not a big fan of being so overweight big tech companies such as Apple (AAPL) and Microsoft (MSFT) in SPY and QQQ. There’s a solution for this that doesn’t move too far from SPY and QQQ. They’re called equal-weight ETFs:

As the name implies, equal-weight ETFs hold the stocks of whatever index they track in equal proportion. Not based on market cap. So, in SPY, for example, names at the bottom of the list, such as Alaska Air Group (ALK), Hasbro (HAS) and Boston Properties (BXP) have as much of a relative impact on performance as Apple or Microsoft.

While SPY and QQQ have, for the most part outperformed their equal-weight counterparts (see more at the above-linked Juice), they have done quite well for themselves. Therefore, an equal-weight ETF can be a nice addition to or replacement for SPY and QQQ depending on how you see these things. 

If you don’t like being overweight, it’s pretty cool to dig into an equal-weight ETF’s list of holdings and see the same percentage allocations across the board. Which brings us to the next critical point. If you’re unaware of what’s in an index a passive ETF tracks or an active ETF tricks out an index or a pure stock-picking, maybe theme-based active ETF, you probably shouldn’t be investing in the ETF. 

You have to know what’s under the hood. Which stocks — and how much of each — does the ETF you’re looking at own?

To answer that question, you only have to undertake a simple process:

  • Do a basic Google search. In this case, Google “(name of the ETF) holdings.” 
  • One of your first results will be the webpage of the firm that puts out the ETF you want info on. 
  • Once on the page for the SPY ETF, you’ll see a menu with links to items such as “overview,” “performance” and “holdings.” To see the ETF’s portfolio, click “holdings.”

Suddenly — stopping right there — you’ve likely done more research than a majority of investors. But you’re not going to stop right there. 

Consider today’s Trackstar top of the large cap ETFs investors have been searching for most. It’s no shock that SPY and QQQ top the list. The Vanguard S&P 500 ETF (VOO) is the exact same thing as SPY. With an expense ratio (0.03%) that’s actually lower than SPY’s (0.09%), VOO would be an excellent choice for the S&P 500-tracking position in your portfolio. 

But let’s say you’ve heard talking of dividend stocks coming back once interest rates finally start to come down. So you want to buy a dividend ETF. You see the Schwab US Dividend Equity ETF (SCHD) come up in Trackstar all of the time. You shouldn’t just buy the ETF sight unseen. Go to Schwab’s Website (after you catch up on your Juices) and see what’s under the hood. 

When you do that, you’ll find the following top 10 holdings:

  • Broadcom (AVGO)
  • Merck & Co (MRK)
  • Abbvie (ABBV)
  • Amgen (AMGN)
  • Home Depot (HD)
  • Verizon (VZ)
  • Cisco Systems (CSCO)
  • Texas Instrument (TXN)
  • Chevron (CVX)
  • Coca-Cola (KO)

These ten stocks make up about 42% of the ETF, which holds the stocks in another index, the Dow Jones U.S. Dividend 100 Index. You can go further and look at them all. But, based on the top ten alone, you know that you might own some of these names in another ETF (like SPY or QQQ), but you’re getting them in larger concentrations here, while not getting any exposure to some of the biggest holdings in SPY or QQQ. 

Doing research this way is one way to actually be able to get to something that looks like diversification. And it’s crucial for long-term investing, specifically with sights set on retirement. 

The Bottom Line: So, before we invest that $500 every month, let’s beef up our research chops a little more. In tomorrow’s Juice, we’ll expand this exercise out to different types of ETFs. 

We try to give you tidbits about personal finance and investing you can actually use. This isn’t limited to stock picks — as much as we love to crush those for you — but it involves defining and detailing basic processes that most investors just don’t use. If you use them — and it only takes a few minutes — you’ve just given yourself a long-term investing edge.

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