If One ETF is a Good Idea…
One of the most frequent and common questions that comes my way has to do with picking ETF investments. The corollary is similar: how much should I buy of each one? The first thing I always do when considering an ETF is to look at the top ten investments in the ETF. Because diversification is important, I want to know something about the holdings.
Apple Microsoft and Amazon
If you look at large-cap ETFs, you often will see some big names in the top ten. While the nature of each ETF can be different in things like number of holdings and expense ratios, it isn’t uncommon to see names like Apple, Microsoft, Amazon, Facebook, Google, Tesla, and JP Morgan in the top ten. The reason is simple: most ETFs are not equal-weighted. They are cap weighted. That means the biggest investments will often be a disproportionate allocation of your investment dollars. That is wonderful when the big names are prospering. Bull markets make those funds look like money machines. However, bear markets can create a huge plunge when you have too many assets in the top ten assets in the USA stock market.
Which is better: QQQ or SPY?
SPY is the SPDR S&P 500 Trust ETF and QQQ is the Invesco QQQ ETF. QQQ has amazing ten-year results. But don’t buy investments based on past performance. Therefore, the answer to which is better is “it depends.” If you think the bull market will continue to charge, go for QQQ. If you think it is time for a serious downdraft or a bear market, be ready to watch your assets fall quickly.
From a diversification perspective, I would buy SPY and VYM over QQQ and VYM. I don’t think it is prudent to buy both QQQ and SPY. There may be some amazing results by doing so, but don’t make that decision before you consider the risks.
One other point of caution: these three ETFs focus on large cap stocks. Don’t miss the opportunities that are found in mid-cap and small-cap companies. Most of the real growth is often in those sections of the economy. There are good ETFs that provide exposure to those parts of the market as well.
You might be wondering, “why did Wayne pick these three ETF’s for comparison purposes?” These three funds are all very popular and I often see them in questions I receive from my readers. Cindie and I own shares of VYM. In fact, it is our largest holding. We have 2,225 shares of VYM.