Investing in Stocks: MF/ETF
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- Last Updated: Thursday, 13 March 2025 21:23
- Published: Wednesday, 27 January 2021 07:47
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Investing in Stocks
As I've indicated in other sections, stocks are the only game in town. Even though Stocks are a ponzi scheme, as we can see based on returns they provide over a 30 year period, they are supported by the full backing and faith of the FED, which is a branch of the government. This branch of government can print infinite money to support the stock market, so stock market will be the winner of all the assets out there.
Should you invest in individual stocks?
There are several reasons why investing in individual stocks should be avoided at all costs. It's a scheme that's followed by a lot of people all over the world, who claim to have made big money, but it's mathematically very very low probabaility event. Of course some people like Warren Buffet have become super rich by investing in individual stocks. We'll discuss that later.
Below are some the reasons for not investing in individual stocks:
1. Predicting future of a company: No one can predict the future of a company, not even the founder of a company. As an example, check Steve Jobs. After introducing ipods in 2003, he kept on exchanging his higher priced stock options for a lower price, and accepting lower number of stock options in the process. He probably believed that his higher priced stock options would be worthless (as the stock may never get to that price). If he knew that his product and the company are going to be successful, he would have probably kept these higher priced stock options, and gotten way more richer. The stocks have gone up by 1000X from his exercise price in 2003. When the founder of the company who has all the insights, doesn't know the future of the company, who are we to predict the success of the company?
Here's another article about Tesla Founder Elon Musk, who on May 1, 2020 claimed that Tesla stock was over valued (even though he was the CEO at that time). If you were smart, you would have sold your Tesla stock, since there's no one who knows Tesla better than Elon Musk. Guess what? The stock went up 8 times from that price in less than 18 months.
So this shows that all those stock pickers, wall street firms, etc predicting future of a company are just wasting everyone's time. Some of them will be right some of the time, just due to nature of probablity and statistics, but noone will be right all the time. God and only God knows the future !!
2. Life cycle of a company: There are more than 5K companies in US stock exchange. How do you figure which company you should invest in? Over long term, all companies either get bought out or go bankrupt. Starting from 1955, only 60 of the Fortune 500 companies remained in the list as of 2017. That means most companies got out of business, no matter how successful they were at a time. So, you not only have to invest in the right company, know the future of the company, but also time it so that you can exit at the top price for that company. That's impossible? If you could predict all these, you are already a GOD, and there's no need for money !!
3. Ponzi scheme: If you believe that Stock market is a ponzi scheme, then you should know that the market provides 10%-20% return with FED's support to this ponzi scheme. What FED guarantees is that it will take the market higher by a certain % every year. It doesn't guarantee any individual stock's return. You can think of it as FED saying that they will take the average price of all these stocks (that comprises the stock market) higher by 10% per year. Obviously since the mean is going up by 10%, some stocks will go up by >10%, while some stocks will go up by <10%. It's impossible to know which stocks will go up by more than 10% consistently. FED will save the market, but not any individual company (as it'll be seen as preferred treatment, and potentially illegal activity). Read the article on Fed's "stock market: Is it a Ponzi scheme" and "A dual class society".
4. There's nothing called Value: You may think that value stocks will be the ones that will give you >10% (as Warren Buffet famously preaches). But these value stocks don't really have any value. Everything is way overpriced with respect to what any sane investor would pay for any of these businesses. The fact that they are trading on a stock exchange by it's very nature implies there is no value. They are all stocks with some random number written on them that determines their price. People start betting on both sides of that number, some betting that the number will go up, while some betting that the number will go down. That determines the daily price. It can keep trading like this till infinity, and the number has no meaning. The only thing that is guaranteed is that the average number of all the stocks will go up by 10% every year. The only real return that you get from any stock is the amount of money that it pays in dividend over your lifetime holding it.
5. No recovery from loss: Let's say you bought an individual stock that eventually went bankrupt or goes down by 90% or so. There is no way that you can recover this loss. Why? Because there's very little money left to invest in anything else. You will need a 900% gain to recover from a 90% loss. That kind of gains can't come in your entire lifetime with any sane investment. The money is almost all gone. No one can declare that a company will never ever go bankrupt. Warren Buffet keeps saying that he picks companies that are going to live for ever, and I've always scratched my head as to how can he guarantee that. To declare perpetual existence of a company, you have to know the future competition, future customers, future CEOs of that company, future shifts in taste of consumers, and a heck lot of future things both inside that company, as well as outside that company. If you can really predict all that, you are a GOD in human form and you don't need to be trading on stock market. You are way beyond that lowly humanly thing !!
Investing in Index Funds?
The only time when you lose money on a stock is when the company goes bankrupt. At that time, the number on that stock (i.e it's price) goes to 0 since it's not going to be traded anymore on the stock market. So, the price just disappears. Most of the companies eventually go bankrupt, so you have a high chance of losing all the money invested in that stock.
If you buy any large basket of stocks, you are piggybacking on the FED. You are basically saying that you will take the guaranteed return that FED is providing you with 0 risk. There's no science or IQ involved in choosing stocks. They are just random papers with some numbers written on them, that determine their price. The sum of all of these numbers is guaranteed by FED for a yearly +ve return, so stick to that.
This is how to think of the market return. Plot a graph, with Y axis being the % return per year and X axis being the year. FED puts a horizontal line with a Y=10%, implying stocks increase by 10% for each year. Now on any given day, there will be bunch of stocks with returns higher than 10%, and many with returns lower than 10%.
FIXME: Put a graph ?
Stock trading in USA:
Once you have brokerage account opened (see details in brokerage section), you are ready to start trading. Before we get into details, let's see which are biggest holders of stocks. Ultimately it's we people who own most of the stocks in the world, but we usually buy it one of the 3 forms: as Mutual Fund (MF), ETF or individual stocks. Mutual Fund and ETF are explained below. These Mutual Fund and ETF are issued by some company and they are the ones who are listed as having owneership stake in these companies. These companies become the biggest owners of many of these public companies, and are listed as majority holders, even though in reality, their ETF/MF are ultimately owned by people.
The US stock market is $40T as of 2023. These are the 10 Companies with largest Assets under Management (AUM):
10 Largest Asset Management Companies in the World - Largest.org
Stocks to buy:
Well, as we learned in above section, there is no rationality in buying any individual stock. You should buy the whole market, or any index which represents a significant portion of the market. W500, SPY500, DJIA or anything like this will work. You can go for a limited index as index of 30 stocks, or an index that captures atleast 25% of the total market cap. So, top 10 stocks of the US market will also be fine as an index, if you want to do it on your own (i.e buy these top 10 stocks in proportion to their market cap, and adjust them every few days, but it's just lot of work). So, we'll buy ETF or mutual funds that charge a small fee, but allow us to trade a basket of stocks as 1 stock.
ETF vs Mutual Fund (MF):
A lot of money goes into buying stocks via mutual funds and ETF. As of 2020, total net assets of mutual funds registered in USA was $24T in 2020, compared to $5.5T in 1998. In contarst total net asset of ETF is $5.5T in 2020, compared to $0.1T in 2002. Of the total ETF market, 80% is equity ETF, 15% is Bond ETF, and remaining 5% is misc as commodities, convertibles, etc. Just in 2020 alone, $0.5T of money went in equity ETF, and as of Dec 2021, $0.8T of new money has already made it's way into equity ETF, which are both a record. So, you can see that ETF are growing in popularity much faster than mutual funds. A big reason for that is that ETFs can be traded anytime of day, which allows daytraders to get in and out with pretty low expenses.
ETF and Mutual Funds are not very different. They have a basket of stocks. They put this basket under a ticker symbol. You buy or sell this basket under the ticker symbol of that Fund. It's just like trading an individual stock. However, individual stocks don't charge you any annual fees. But these funds charge you an annual fee (known as expense ratio) which is a certain % of the fund amount. ETF charge you much lower fees (<0.1%) than Mutual Fund (usually 0.5%). Also, ETF can be bought or sold on the trade exchange anytime during the day, and their prices change continually. However, mutual funds only trade after market close at the set price. So, it's advantageous to buy ETF, as you can buy/sell at certain price.
Active Vs Passive:
Both ETF and MF can be actively managed by a group of professionals or be passively managed by a computer.
Actively managed ETFs and MF charge higher expense ratio as they need to pay a bunch of people managing ETF/MF. These people decide what all stocks to keep in the ETF/MF and keep on readjusting it.
Passively managed ETFs and MF charge lower expense ratio as they not managed actively by a person, but rather by a computer. They are also called index funds or index ETF as they track a particular index like S&P500, DOW30, or something like that. These ETFs and MF just mimmick those index, but have to pay some licensing fee to the company holding the rights to that index.
Most of the actively managed ETF and mutual funds are not able to beat an index fund, so no reason to pay a bunch of people managing ETF or mutual fund. They are wasting their time and your money.
Conclusion: Buy passively managed ETF and MF tracking a wide market index (i.e S&P500) as they have lower expense ratio. 90% of actively managed MF/ETF are not able to beat passive index funds. Among MF and ET, go for ETF as they not only charge lower fees, but also give you the control over buying/selling price.
There are thousands of ETF floated by various companies, mimicking various indices.These are the largest ETF companies, issuing a lot of ETF:
https://www.investopedia.com/articles/investing/080415/5-biggest-etf-companies.asp
- Blackrock (issuer of iShare ETF), Vanguard (largest ETF are VTI and VOO) and State Street (issuer of SPY ETF) are 3 biggest ETF issuers in US capturing 70% of US ETF market.
- Invesco (issuer of QQQ ETF) is at number 4. Charles Schwab comes at number 5, but is rapidly capturing market, with it's lowest "expense ratio" ETF. "SCHD" (US Dividend Equity ETF) is the largest ETF issued by Schwab.
Vanguard and Charles Schwab provide lowest cost ETF in general. When looking for any ETF, you will always find lowest fee ETF in that category to be from Vanguard or Schwab, so easy decision there. Vanguard has been known to be a leader in low cost ETF and MF, but schwab and others have been catching up lately.
This is the website with full details of all ETF: https://etfdb.com/etfs
This is a list of largest ETF: https://etfdb.com/compare/market-cap/
- Total ETF AUM globally was $10T as of May, 2023. These include all kinds of ETF as Equity, Bond, etc. In terms of asset class focus, equity ETFs currently compose 76% of the global ETF AUM, fixed income 21%, commodities ~3%, and currency and multi asset ETFs ~0.5%. Total Stock market cap is about $100T. So Stock ETFs have about 7% of the total equity market.
- US ETF AUM were $7T as of May, 2023 with ~3100 ETF listed on US exchanges. European market has $1.6T, while Asia region has $1.2T in ETF AUM. So, 70% of global ETF are actually US based.
- Top 3 ETF are all passive index tracking S&P500 => SPY, IVV and VOO totaling $1T in AUM. That speaks about the importance of S&P500 as an index compared to any other index of the world.
- Most traded ETF are TQQQ, SPY, QQQ with daily volume being > 10% of their ETF count.
These are terms to know when trading ETF:
- Expense ratio: Different ETF charge different expense ratio. Usually you should go with one with the lowest expense ratio. Expense ratio of most ETF is much lower those of equivalent MF. Some large Fidelity and Vanguard MF actually have expense ratio of 0.01%-0.02%, which is lower than equivalent ETF, so there are exceptions here and there. The only risk with "Expense ratio" is that it may change from time to time, so we are at the mercy of ETF issuers. Historically, Vanguard and Schwab have never raised their "Expense ratio" for their top ETF, so hopefully, we'll never have to liquidate those and move somewhere else.
- Spread: Other aspect of ETF is liquidity. If a ETF is highly traded, it's spread b/w buy and sell will be very small, so you don't lose much money when buying/selling these. However, if it's thinly traded (because not too many people have this), it may have a larger spread of say 10 cents/share or so. Let's say you buy a ETF at $500/share which has expense ratio of 0.1%. So, you pay a yearly fees of 50 cents/share. Now, if every time you buy or sell and you have a spread of 10 cents, your yearly cost is suddenly 70 cents/share (assuming you buy/sell once every year). This spread will eat into your profits.Also, a lower priced ETF will have larger spread as a percentage of ETF price than one with a higher price. So, it's advantageous to buy ETF with larger price. However, if you are a log term term buy and hold investor, then spreads don't matter as it's only 1 time expense. Expense ratio matter more, so you should go with low expense ratio ETF at cost of higher spread.
- Premium/discount: ETF have NAV value which is the value of all stocks in that ETF. Most of the times ETF will trade at exactly the same price as it's underlying stock holdings. But sometimes there is a small discrepancy. If the ETF trades for less than it's underlying NAV, it's said to be trading at a discount, while for the other way around, it's said to be trading at a premium. You should buy ETF on a down day, as you may get some discount. Here's more detail: https://www.fidelity.com/learning-center/investment-products/etf/premiums-discounts-etfs
- Dividend: The way ETF pay dividend is at the end of the quarter on a certain date. However, individual stocks underlying the ETF pay dividends thru out the quarter at different times. By not paying the dividend as soon it's avilable, we lose that opportunity to reinvest that dividend earlier. This dividend meanwhile sits in the ETF trust earning 0% interest. Dividend history of any ETF or stock can be found at: https://www.dividend.com
Best Equity Mutual Fund:
Even though I don't recommend Mutual funds in general, you will be surprised to know that there are a few "no expense" MF. There are also few MF whose expense ratio is actually lower than equivalent ETF, so it may be beneficial to own these MF over similar ETF. The only downside is that you can only buy it at closing price.
I've included few low cost MF below.
1. Fidelity "zero expense" Index funds:
In 2019, mutual fund giant Fidelity Investments shocked the market when it launched the first mutual funds with a zero expense ratio. Fideltiy introduced 4 "zero expense" index mutual funds.
- Fidelity ZERO Large Cap Index Fund (MUTF:FNILX) : FNILX “seeks to provide investment results that correspond to the total return of a broad range of large-capitalization U.S. companies" as per Fidelity. It has 506 stocks and looks similar to S&P500
- Fidelity ZERO Total Market Index Fund (MUTF:FZROX): FZROX "“seeks to provide investment results that correspond to the total return of a broad range of publicly traded companies in the US,” as per Fidelity. It has 2500 stocks and looks similar to Wilshire 5000.
- Fidelity ZERO International Index Fund (MUTF:FZILX: FZILX is an international counterpart of the domestic FNILX. It is a blend of developed and emerging markets with the latter representing over 20% of the fund’s weight. It has a 38% weight to Europe, while Japan and the U.K. combine for over 28%.
- Fidelity ZERO Extended Market Index Fund (MUTF:FZIPX): FZIPX focuses on mid- and small-cap stocks. It has 2000 stocks, and basically excludes the S&P 500 from its roster.
2. Fidelity 500 index fund (FXAIX):
This index fund tracks S&P500. Even though this is an index mutual fund, it's expense ratio is pretty small at 0.01%. It's even lower than the lowest cost ETF. It's provided by Fidelity.
3. Vanguard Institutional 500 Index Trust (VFFSX):
This is another mutual fund tracking S&P500 similar to Fidelity's FXAIX. It's expense ratio is also small at 0.01%.
4. Vanguard Total Stock Market Index Fund Institutional Plus Shares (VSMPX):
This is yet another MF tracking total stock market, whose expense ratio is small at 0.02%.
Best Equity ETF:
You should look to buy ETF with expense ratio < 0.1%. On $1M in stocks, 0.1% expense ratio would cost you about $1K/year, which is not great but still OK. There are few "zero cost" ETF too, though not that widespread.
"Zero" expense ETF:
This article tries to compare "zero expense" ETF with similar "low cost" ETF. Verdict is that the spread in these "zero expense" ETF more than eats up the "free part" and you end up paying more. Many of these 0% expense ratio funds are gimmick, since they raise the fees later. Or they are introductory, where they are "zero" for a while, but go to regular fees after some time.
https://etfmathguy.com/zero-and-negative-expense-ratio-etfs-have-arrived
As of Apr 2022, six ETFs charge no expense ratio, according to ETF Database. One of them is Bond ETF (BKLG), while 2 of them are Exchage Trade Notes (ETN) and NOT ETF. ETN don’t hold the securities in an index, but are unsecured debt securities that promise to pay the return of an underlying index minus the expense ratio. The Pacer iPath Gold ETN (GBUG), which seeks to track the return of the Barclays Gold 3-Month Index Total-Return; and the iPath Silver ETN (SBUG), which tracks the Barclays Silver 3 Month Index Total Return Index.If we leave these 3 aside, below are the 3equity ETF with "zero fees".
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BNY Mellon U.S. Large Cap Core Equity ETF (BKLC): This is the most widely avialable ETF with no expense ratio, i.e expense is 0%. However, the price of this ETF is about 1/6th the price of similar SPY ETF. This results in a larger spread. As an ex, consider SPY ETF at $500 and BKLC at $80. A spread of 5 cents in buy/sell bid results in 5X worse loss in BKLC. So, what you save in expense ratio, is lost in the spread when buying this. Also, the dividend in this is lower than the SPY ETF. So, I wouldn't recommend this ETF, even with it's 0% expense ratio. You need to get at least the same dividend as S&P 500, or else it's not worth the risk.
- Next are the 2 SoFi ETF. Both have temporarily waived fees until at least June 30, 2020. So, these are dubious, as they will raise fees, and we won't know by how much. So, best to avoid these too.
- SoFi Select 500 ETF (SFY): Similar to the S&P 500 Growth Index in that it is composed of the 500 largest publicly traded U.S. companies. Similar to the iShares S&P 500 Growth ETF (IVW)
- SoFi Next 500 ETF (SFYX): Composed of 500 mid-cap U.S. companies weighted on not just market capitalization but three growth signals. This is a similar fund to the SPDR S&P MIDCAP 400 ETF (MDY)
Below are best low cost equity ETF to buy (The lowest cost ETF are around 0.03%):
ETF mimicking S&P 500 index:
These mimick S&P 500 index. Their expense ratio can't go below 0.03% as this is the licensing fees ETF have to pay to S&P. Their yield is about 1.3% as of 2021.
1. SPDR S&P 500 index ETF (SPY):
This is the most popular ETF, but it has a higher expense ratio of 0.09%. You can can get same S&P500 ETF with less than half the fees, so don't buy this. In past there weren't any lower cost alternative, so this ETF thrived, but now you have cheaper options, with same return. However, it's stil the largest equity ETF as of 2021, because most people hear about this ETF only and don't know that alternatives exist.
2. ishares core S&P 500 ETF (IVV):
This is similar to SPY, but with a lower expense ratio of 0.03%. This is one of the lowest cost ETF mimicking S&P 500, so go with this, or with the next one.
3. Vanguard S&P 500 ETF (VOO):
This is similar to IVV, and it's expense ratio is also 0.03%. I assume IVV may be better, as the price of IVV is 10% higher than that of VOO, so you lose a little less in the spread. Personally, I've bought VOO, as the difference is probably negligible. Also, VOO is product of Vanguard, which is what I personally prefer.
ETF mimicking Nasdaq 100 index:
As we saw in our earlier section that Nasdaq has beaten S&P500 over all periods of > 10 years of holding, It lost to S&P 500 only when you bought at peak of stock market in 2000. So, if the stock market (i.e Wilshire 5000) is more than 10% down from it's peak, then it's time to start putting some money in Nasdaq ETF, as you are guaranteed higher returns than S&P500 (assuming FED will pumping money into this ponzi scheme). Nasdaq ETF in general have much higher expense ratio (I'm not sure why, since it's also passively managed). However dividend yield for this is only 0.5% as most stocks don't pay any dividend. Below are ETF mimicking nasdaq 100 (which is a subset of Nasdaq stock market).
1. Invesco QQQ Trust ETF (QQQ):
This is the most popular ETF for Nasdaq 100, but it has a higher expense ratio of 0.2%. It's structured as a trust fund. I don't know of any difference it makes for an investor. This is among the top 5 equity ETF. It has high liquidity. It's spread is small at 1 cent. It used to trade under symbol "QQQQ" but since has dropped 1 Q.
2. Invesco Nasdaq 100 ETF (QQQM):
This is issued by same company and is same as QQQ except that it's expense ratio is 0.15%, and it's an open ended ETF. It is called as "Triple Q Mini". It has a larger spread of 3 cents as it's thinly traded (it has < 1% of AUM than QQQ) . However, QQQM is preferred and there is no reason to hold QQQ in favor of QQQM. QQQM is ideal for long term investors, and gradually adding to this ETF at drops of 10% or more of the market (i.e 10% drop in S&P500) would serve well in stock market ponzi scheme.
ETF mimicking Total US Stock market index:
We may also look into US total equity market index mimicking Wilshire 5000.
1.Vanguard Total Stock Market ETF (VTI):
Expense ratio is 0.03%, and this is among the top 5 equity ETF (as of Jan, 2022, expense ratio shows as 0.02% on most websites, probably, because the index has gone up, while their annual costs might have remained the same). However, the yield here is 10% lower than S&P500, and the difference in return b/w this and S&P500 is small. So, better to stick with S&P500 over this. There is an excellent article comparing it to SPY:
https://seekingalpha.com/article/4438495-spy-vs-vti-etf-better-buy
2. Schwab US Broad Market ETF (SCHB):
Similar to VTI, but tracks only 1500 companies. Expense ratio is 0.03%, and it has Schwab's name behind it.
Other low cost or high return ETF:
1. Ark Innovation ETF (ARKK):
Ark Innovation has couple of ETF, but this is the one that is the most popular and hot ETF. It's expense ratio is high at 0.75%. It was incepted in 2014, and in last 8 years, it has given returns that blow even Warren Buffet's returns. It's rock star manager, Cathie Woods actively manages this ETF, and tries to find highly innovative and disruptive companies anywhere in the world that will yield insane returns. I'm not a fan of this ETF, as this ETF was formed during an equally insane bull market, so basket of risky junk stocks will almost always will give you better returns than non junk ones. This ETF needs to go thru 30%-50% market correction in order to find out it's real returns.
UPDATE: As of Jan 2022, ARKK is already down 55%, while S&P is down only 5% from it's peak. That speaks to the insane returns that a bull market can provide to non-sense funds. If it wasn't for Tesla stock in it's holdings, ARKK would have given 8 year return less than that of S&P500. Most of these ETFs get lucky in 1 stock that gives them 100X or 1000X returns. In such cases, even if all the other stocks go bankrupt, the fund is still able to deliver a decent return, and their manager get a rock star status and a multi million dollar pay check.
2. RoundHill's Magnificent 7 ETF (MAGS):
This is the Mag 7 ETF (7 stocks being AAPL, MSFT, NVDA, TSLA, META, GOOG, AMZN). It provides equal weighting to all stocks (though tsla is at 10%, while others are at 15%). Launched in 2023, it's expense ratio is 0.29%. Not worth it, as it's not diversified enough. It came into existence when biggest US companies were giving the biggest gains in stock market. Over time, it will give almost same return as Nasdaq 100.
3. iShare Top 20 US Stock ETF (TOPT):
This is exactly what the name says => Top 20 US stocks by market cap. This was launched in Oct, 2024, on same lines as Mag7. However, this ETF is diversified enough as top 20 US companies make up ~ 50% of S&P500 market cap. Expense ratio is 0.2%, so similar to QQQ, but not as diversified. Link => https://www.ishares.com/us/products/339779/ishares-top-20-u-s-stocks-etf
Leveraged ETF:
Leveraged ETF are latest rage (as in leve-rage), as they amplify your returns by a factor > 1. So, if you lose 10% in a day, a 3X levereged ETF will lose 30% for the day. Conversely if you gain 10% in a day, a 3X levereged ETF will gain 30% for the day. You have all kinds of leveraged ETF from 2X to 4X with all popular indices in both long and short direction. Last 10 years have seen a big bull market with no corrections, which have given compounded returns of >30% for these "long" ETF. These, as the name implies, are long ETF, i.e they go long on the stocks, meaning your returns are in same direction as the un leveraged ETF. There is also short ETF, which goes in opposite direction of the underlying non-leveraged ETF, i.e if the underlying ETF goes up, your leveraged goes down and vice versa. This is essentially like shorting the market, except that you are leveraging to amplify the return. Since there is no free lunch, and someone else is taking the risk to amplify your returns, these ETF charge you lot higher fees, usually at 1%.
The below article shows how much return an ETF named TQQQ which is a 3X leveraged version of QQQ ETF has given to it's holders.
https://www.optimizedportfolio.com/tqqq/
As can be seen it gave 50% annual return to it's holders. A $10K sum invested in TQQQ turned into $600K in 10 years.However if you had invested your money in the TQQQ ETF right before 2000 crash, you would not recover your money in your lifetime. However, as shown in link above, if you had hypothetically invested in TQQQ in 1980, you would have managed to get 4X the return of Nasdaq, even with all the ups and downs. So, why are leveraged ETF not considered long term investement?
Reason is that leveraged ETF will eventually go down down to 0, over long time horizon, so you are essentially guaranteed 100%. Why it happens, is loss due to ups and downs of market, and these ETF being adjusted on a daily basis. You can think of ups and downs as oscillations, which take energy out of these leveraged ETF. Market going up increases the energy in leveraged ETF, but these oscillations keep on sucking energy ot. Larger the oscillations, larger the energy sucked. Eventually, oscillation energy may overwhelm the energy due to markets moving higher. More the ups and downs, quicker will the leveraged ETF go down to 0.
Since 2009, rules of leveraging have changed. FED has now guaranteed that markets will only go higher, the oscillations will be small, and they will move quick to recover any losses happening in market. In fact, FED is encouraging leveraging by providing money at close to 0% interest. This means that leveraged ETF may keep on outperforming non leveraged ETF as long as the FED has the power to print money. However, if a sane government comes into rule, there may be no FED, nor any of their money printing press. So, we should be cautious with these extremely dangerous products. They have the risk to wipe you off completely if sanity ever returns.
This article discusses some more: https://seekingalpha.com/article/4378063-tqqq-is-high-risk-low-reward-investment
So, the lesson with leveraged ETF is to use them for only a very small portion of your portfolio, and that also after a 30% crash from the top.
These are few leveraged ETF: The link shows the top ones: https://etfdb.com/etfs/leveraged/equity/
ProShares Ultra are 2X leveraged, while ProShares UltraPro are 3X leveraged. If they don't have the word "short" in the name, then they are "long" ETF, while ones with word "short" are short ETF. So, in a bull market, short ETF suffer badly, while in a bear market, they give great return. Since we are investing in the stock market for ever, "short" ETF have no place in our portfolio (they will eventually go down to zero).
1. S&P 500: ProShares Ultra S&P500 (SSO) is 2X leveraged, while ProShares UltraPro S&P500 (UPRO) is 3X leveraged version of SPY. Their expense ratio is 0.93% for both, and dividend is close to 0.01%.
2. Nasdaq 100: ProShares Ultra QQQ (QLD) is 2X leveraged, while ProShares UltraPro QQQ (TQQQ) is 3X leveraged version of QQQ. Their expense ratio is 0.95% for both, and dividend is close to 0.01%.
If you really have to invest in leveraged ETF, TQQQ is the best option of all, as it's most highly traded leveraged ETF (with $18B in AUM), and allows you to maximize your return by going all in.
Which index funds to stick to?
So, now that we have looked at index ETF and MF, which index should we try to mimic? Let's see below.
SPY ETF:
Below is the dividend history of SPY ETF, which is longest one to track S&P500: https://www.dividend.com/etfs/spy-spdr-s-p-500-etf-trust/
In 1994, dividend for SPY was $1.17/unit, while in 2021, dividend was $5.65/unit. So, dividend went up almost 5X in 28 years, implying an average annual growth of 5%-6% in dividend. In 2000, dividend was $1.45/unit. while in 2010, dividend was $2.2/unit. So, dividend used to grow by 4% a year before 2010, but since 2010, it has really sped up, and increasing at a rate of 8% a year. This means, more and more companies are maxing out on their dividend, and room for further dividend growth is getting smaller. This is unsustainable dividend growth. Dividend can grow only by same rate as GDP, as revenues and profit increase by same rate as GDP, so it's logical that dividends would also go up by same rate. Also, other thing to note is that dividend used to yield 2.5%/unit (price=$45/unit in 1994) in 1990s, but now it yields 1.25%/unit (price=$450/unit as of 2021). This implies that not only have dividends been growing faster, but stock prices have been growing even faster (dividends went up 5X while stock prices went up 10X).
QQQ ETF:
Below is the dividend history of QQQ ETF, which is longest one to track Nasdaq100: https://www.dividend.com/etfs/qqq-invesco-qqq-trust/
Unfortunately it shows dividend data starting from 2008, even though this was launched in 1999. In 2008, dividend was $0.14/unit, while in 2021, dividend was $1.7/unit. So, it went 12X in 14 years, implying an average annual growth of 20% in dividend, which is insane. The dividend yield used to be paltry 0.3%/unit (price=$40/unit in 2008), but now it yields 0.4%/unit (price=$400/unit in 2021). So, QQQ yield has gone up, in contrast to SPY yield which has gone down. Meanwhile, QQQ has also gone up 10X in last 15 years, while it took SPY 30 years to get to 10X. So, QQQ has been growing much faster than SPY, and yields between SPY and QQQ are narrowing at the same time.
Conclusion: So, it would make sense to invest into both S&P500 and Nasdaq100. The best way to start would be to mimic S&P500 index. Once S&P500 has crashed 20% from the peak, we should start reducing S&P500 index and start increasing Nasdaq100 index. At 40% crash of S&P500 index, we should be investing 100% into Nasdaq100 index. Between 20% to 40% crash of S&P500 index, we should linearly go from 100% to 0% for S&P500, and from 0% to 100% for Nasdaq100 index. This would give a good mix of dividend yield and stock price appreciation.
Individual stocks:
After a long rambling on why not to buy individual stock, there may still be the testosterone in us that wants to try something manly. In that case, it's OK to invest < 5% of your total holdings in individual stocks. However, always assume that you may completely lose money on this 5%. But we'll make up for the loss by remaining invested in whole of the market in the remaining 95%, which will always overcome the 5% loss, and take us back to positive return.
Selected Stocks to buy: https://www.simplysafedividends.com/intelligent-income/posts/1-living-off-dividends-in-retirement
According to the Wall Street Journal, over the past 50 years the S&P 500’s dividends grew at an average 5.7% per year, outpacing the average 4.1% inflation rate.
https://www.simplysafedividends.com/intelligent-income/posts/6-dividend-aristocrats
53 companies listed here. Most of them have dividends > 2%.
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Happy investing in the biggest Govt run Ponzi scheme !!