3 ETF Investing Terms You Need To Know

One of the benefits of subscribing to The Juice newsletter is that we’re building quite the content library focused on subjects that matter most to investors. Particularly retirement planning, which often includes buying exchange-traded funds (ETFs). 

Forward this email to a friend and feel free to scroll through The Juice archives at this link. We hit key areas on investing, personal finance, housing and the economy from myriad angles, tying it all together to help you be better with money. 

We also use Trackstar, our proprietary sentiment indicator, to help illustrate what we cover and to help uncover investment ideas. 

Today’s Trackstar top five will help us as we define three key ETF investing terms you need to know. 

Expense Ratio

We covered this in detail at the aptly titled, What Is An ETF Expense Ratio?—

Let’s say you have $100,000 invested in the SPDR S&P 500 ETF (SPY), which has a low expense ratio of 0.09%. You’ll pay $90 in year one on that balance. But it’s not just a $90 annual fee. It’s based on your balance. So, as your investment grows, you pay more each year. A 0.09% expense ratio on a $120,000 balance equals $108.

We think this is a more than reasonable price to pay to be in SPY. It truly gives you access to companies that drive the U.S. economy.

SPY’s S&P 500 tracking rival — the Vanguard S&P 500 ETF (VOO), which is the third most searched large cap growth ETF in Trackstar — charges just 0.03%. You can’t go wrong with either. 

Because an expense ratio essentially accounts for the management, marketing and other costs incurred to run an ETF, these types of passive ETFs tend to be low cost. If your financial advisor wants to get you into something else — or if you’re just kicking some tires yourself — always ask, how much is the expense ratio?

For example, maybe you want exposure to dividend growth stocks via an ETF. This can be a smart move. It’s a hell of a lot easier than buying dividend growth stocks individually. 

You open The Juice and see that financial advisors are searching for the WisdomTree U.S. Dividend Growth Fund (DGRW). We love Wisdom Tree. We cite their research frequently. However, we’re not going to buy this ETF sight unseen. 

First, we find out DGRW’s expense ratio. It’s 0.28%. It tracks one of Wisdom Tree’s own indexes, the WisdomTree U.S. Quality Dividend Growth Index. Microsoft (MSFT) is the top holding at a 7.48% weight, followed by Apple (AAPL) at 4.95% and Johnson & Johnson (JNJ), Abbvie (ABV) and Broadcom (AVGO), all at between 3.50% and 3.75%. 

The portfolio contains the usual suspects for this type of ETF. And that’s fine. We’re not looking to get fancy. We want solid dividend growth names. 

Pro tip: The first thing we do with an ETF like this — and most ETFs really —  is go see if Vanguard has something similar. Turns out it does. The Vanguard Dividend Appreciation ETF (VIG) with an ultra low expense ratio of 0.06%. No surprise given that Vanguard is the pioneer of low-cost, index ETF investing. 

Look under the hood and VIG has MSFT, AAPL and AVGO as its top three holdings. There’s not enough variation between DGRW and VIG to justify paying a penny more to own DGRW. Therefore, if we had to choose between the two, we’d go with VIG in a heartbeat. 

Passive ETFs

You might have figured it out by now, but passive ETFs track stock market indexes. Sometimes they’re super broad indexes, such as the S&P 500. Sometimes they’re sector-specific. As is the case with the fifth most searched ETF on today’s Trackstar list, the Communication Services Select Sector SPDR Fund (XLC). 

With a low expense ratio of 0.09%, XLC looks to mimic the returns of the the communication services sector of the S&P 500 Index. So a subsector of the S&P 500. This is what a passive ETF does. It buys the stocks of an index in near-exact proportion to its underlying index. Just because it’s in a specific sector doesn’t mean it’s an active ETF. 

Weight

All of this said, just because XLC, for example, is passive with a low expense ratio doesn’t mean it’s automatically a fit for your portfolio. 

Look at the portfolio weights. That is the percentage of the portfolio each holding the fund owns takes up. 

In XLC, Meta Platforms (META) accounts for nearly 22% of the fund. Why? Because it accounts for nearly 22% of the index. You’ll see a similar story with the first few holdings in SPY making up a majority of what is a 500-stock portfolio. They’re the giants of the economy. End of story. 

There’s nothing inherently wrong with this. You just have to make sure you want to be overexposed to META. We love META, so The Juice ain’t got no problem with this. 

Bonus pro tip: If you want equal weight exposure, look for an equal weight ETF that buys the stocks of an underlying index in equal proportion. There’s even an ETF that does this in the communications sector — the Invesco S&P 500 Equal Weight Communication Services ETF (RSPC). 

For more, see What Is An Equal-Weight ETF. 

The Bottom Line: Three ultimately simple terms that can confuse even experienced investors. But, if you know and understand them, you can put yourself on a righteous path to no frills, but super effective retirement planning via ETF investing.

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