Exchange-Traded-Fund (ETF) is a game changer in the investment world. It creates a movement in the right direction where everyone can invest passively in index funds or any market sectors around the world in a very low-cost manner.
Without ETF, people who would like to invest in equities to participate in the economic growth would either invest directly in individual stocks or through mutual-funds.
Individual stock picking is not a trivial skill that anyone could learn easily. It requires tremendous time and effort. It is not everyone’s game. For average Joe, buying mutual funds is the only way to participate in the stock market.
Although mutual funds save people time in managing the portfolio, they charge as high as 5% commission per transaction. That is a big drag to the performance of any mutual funds. Let say a fund returns 10%, the investor only gets 5% after commission. Worse, most mutual funds don’t beat the performance of the passive index funds where the ETFs are tracking.
With ETF, people can keep almost all of the market returns since its expense ratio is usually below 1%. Let say an exchange-traded-fund returns 10%, the investor keeps 9% after expense. That is a huge advantage compare to buying mutual fund.
ETF is diversified in a way that it usually holds a bucket of companies at a time. This reduces the non-systemic risk of buying individual stocks.
ETF provides investors access to any asset classes that are categorised by value, growth, commodity, bond, geography (by country), sector, etc around the world. People can, thus, focus on allocating assets and buying the world market through ETFs.
According to research, 90% of the investment returns are coming from asset allocations instead of market timing.
Most of the ETFs are weighted according to market cap. This means that companies with the highest valuation get the biggest shares in the portfolio. There is also fundamentally weighted ETFs that meet the need of value investors where the most undervalued companies constitute the largest components of the index.
In a way, the fundamentally weighted ETFs have strategy automation built-in where the valuation is inversely proportional to allocation: the most undervalued companies are allocated the most funds. The automated rebalancing actually reduces risk and increases return.
With all the good things, ETFs also come with traps: leveraged ETFs and inverse ETFs. If you don’t understand how they work, stay away from them.
ETFs that could double your money in 5 years
| Code | Name | CAGR (5 Years) | AUM | No. of Holdings | Expense Ratio | PE | PTBV | Distribution Yield | Index Weighting Methodology | Inception Date | Brand |
|---|---|---|---|---|---|---|---|---|---|---|---|
| RHS | Guggenheim S&P 500 Equal Weight Consumer Staples ETF | 17.39% | $757.02 M | 34 | 0.40% | 27.13 | 5.45 | 1.60% | Equal | 11/01/06 | Guggenheim |
| PSCC | PowerShares S&P SmallCap Consumer Staples Portfolio | 18.01% | $124.15 M | 14 | 0.29% | 21.83 | 2.13 | 1.25% | Market Cap | 04/07/10 | PowerShares |
| IYC | iShares U.S. Consumer Services ETF | 17.93% | $885.26 M | 173 | 0.45% | 23.07 | 5.01 | 1.00% | Market Cap | 06/12/00 | iShares |
| FXG | First Trust Consumer Staples AlphaDEX Fund | 16.23% | $2.47 B | 38 | 0.62% | 25.88 | 3.76 | 1.61% | Tiered | 05/08/07 | First Trust |
| VCR | Vanguard Consumer Discretionary Index Fund | 17.63% | $1.93 B | 373 | 0.10% | 23.81 | 4.72 | 1.96% | Market Cap | 01/26/04 | Vanguard |
| PSL | PowerShares DWA Consumer Staples Momentum Portfolio | 14.70% | $269.79 M | 30 | 0.60% | 27.23 | 5.41 | 0.91% | Momentum | 10/12/06 | PowerShares |
| VDC | Vanguard Consumer Staples Index Fund | 15.10% | $3.51 B | 99 | 0.10% | 25.72 | 5.07 | 3.35% | Market Cap | 01/26/04 | Vanguard |
| SPLV | Powershares S&P 500 Low Volatility Portfolio | 14.54% | $7.64 B | 99 | 0.25% | 23.98 | 3.40 | 2.01% | Volatility | 05/05/11 | PowerShares |
| DVY | iShares Select Dividend ETF | 14.92% | $16.27 B | 94 | 0.39% | 28.06 | 2.45 | 3.08% | Dividend | 11/03/03 | iShares |
| KBWP | PowerShares KBW Property & Casualty Insurance Portfolio | 20.92% | $68.91 M | 23 | 0.35% | 14.63 | 1.31 | 1.61% | Tiered | 12/02/10 | PowerShares |
| ITA | iShares U.S. Aerospace & Defense ETF | 19.16% | $879.2 M | 36 | 0.44% | 33.70 | 3.78 | 0.85% | Market Cap | 05/01/06 | iShares |
| IHI | iShares U.S. Medical Devices ETF | 19.34% | $1.43 B | 47 | 0.44% | 36.87 | 3.89 | 1.04% | Market Cap | 05/01/06 | iShares |
| SPHD | PowerShares S&P 500 High Dividend Low Volatility Portfolio | -- | $2.68 B | 50 | 0.30% | 20.05 | 2.45 | 3.33% | Dividend | 10/18/12 | PowerShares |
| DON | WisdomTree MidCap Dividend Fund | 15.80% | $2.04 B | 969 | 0.38% | 41.07 | 2.64 | 2.47% | Dividend | 06/16/06 | WisdomTree |
| DHS | WisdomTree High Dividend Fund | 14.64% | $1.31 B | 962 | 0.38% | 29.63 | 2.67 | 3.19% | Dividend | 06/16/06 | WisdomTree |
| JKD | iShares Morningstar Large-Cap ETF | 15.83% | $643.76 M | 76 | 0.20% | 20.58 | 3.33 | 2.27% | Market Cap | 06/28/04 | iShares |
| PEY | PowerShares High Yield Equity Dividend Achievers Portfolio | 17.60% | $1.02 B | 50 | 0.54% | 43.63 | 2.31 | 3.19% | Dividend | 12/09/04 | PowerShares |
| SDY | SPDR S&P Dividend ETF | 15.41% | $14.79 B | 107 | 0.35% | 26.41 | 3.01 | 5.40% | Dividend | 11/08/05 | SPDR |
| VIG | Vanguard Dividend Appreciation Index Fund | 12.70% | $22.56 B | 184 | 0.09% | 24.33 | 4.24 | 2.08% | Market Cap | 04/21/06 | Vanguard |
| NOBL | ProShares S&P 500 Dividend Aristocrats ETF | -- | $2.45 B | 50 | 0.35% | 24.56 | 3.87 | 1.79% | Equal | 10/09/13 | ProShares |
| WDIV | SPDR S&P Global Dividend ETF | -- | $82.31 M | 99 | 0.40% | 19.75 | 1.85 | 4.73% | Dividend | 05/29/13 | SPDR |
The above are some of the ETFs that have returned around and above 15% compound rate over a 5-year period. That translates to doubling your money over 5 years.
If you had $1 million at the beginning to invest in those ETFs, after 5 years, you would have $2 millions. $1 million richer.
Performance of RHS
The image above shows the performance of one of the ETFs.
Final thought
If you had been investing in stocks for more than 5 years but still were unable to double your money, you could consider to switch to buying ETFs instead. ETFs simplify things. My $0.02.
