Financial Well-being

By analyzing overall characteristics of top performing *growth* style etf, such as iShares Russell Top 200 Growth ETF (IWY), with top performing *momentum* style etf, such as Invesco S&P 500 Momentum ETF (SPMO), I have learnt one thing for sure. Growth style seems to have produced similar return as momentum style for long term (5, 10 years) horizon with comparatively much *lower risk*.  Growth fund (such as IWY) has mostly beaten broad market index every year since it's inception in 2009. However, momentum one (such as SPMO) keeps disappointing every other year by underperforming broad market.  So, for more aggressive investing strategy (say 20% of your stock portfolio), when it comes to choosing between growth and momentum, growth seems to be better option.

Invesco S&P 500 *Momentum* ETF (SPMO) seems to have produced *fantastic* total return as compared to Total Stock index. It is an excellent momentum strategy based inexpensive *passive* index fund for *bravehearted*.  It selects top 20% (around 100) companies from S&P 500 market cap index, factoring their last 12 months total return *momentum*. It allocates money based on *market cap* weightage as well as last year's total return *momentum*.  However, as de-risking strategy, it limits any single holding to 9% of portfolio to avoid just single company dominating it. With NVDA driven 45% return in 2024, it has produced annualized 20.57%, 19.83% and 17.77% for 3, 5 and 10 years periods as compared to VTI's  11.65%, 13.83% and 12.88% for same period. If we take out 2024 outperformance from equation, it's returns are similar to growth based IWY. However, above return comes with some added risk. It seems that every year when it outperforms broad market index, it underpe...

I don't like this concept of exchange biased *NASDAQ 100* index which Invesco QQQ Trust ETF (QQQ) follows. It does not make any sense to just *favor* one exchange over other. There are better *large cap growth* options (such as IWY) which don't have such weird bias. QQQ has enjoyed great ride of technology sector revolution of last 15 years. However, technology sector *lagged* quite a bit during previous decade of dot com bust. Having better *diversified* (without any *exchange bias* ) large cap growth fund, such as IWY, is perhaps safer bet.

When it comes to *pure technology* sector based passive index fund, I believe Technology Select Sector SPDR Fund etf (XLK) is pretty solid long term choice. This inexpensive (expense ratio 0.09%) passive etf tracks all the technology sector companies within S&P 500.  It caps weightage of top mega caps to max 50% of it's portfolio to *avoid overconcentration* to just few momentum mega cap technology stocks. Also, no single stock can weigh more than 23%.  Above *checks and balances* in capping individual *high flying* stock weightage was one of the main reasons how this fund outperformed it's index during *2022 technology crash*. It's losses were 10-15% less than it's index that year. It faired way better than it's index in dot com bust years too.  As always, consider limiting your investment into aggressive asset classes, such as technology, to max 20% of your stock equity holdings.

The Roundhill Magnificent Seven ETF ( *MAGS* ) offers *equal weight* concentrated exposure to the “Magnificent Seven” stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.  It's P/E of 29.70 is very similar to broad technology sector, which is good. However, it's projected long-Term earnings growth rate is 10% *poorer* than it's technology index. Perhaps these are *too big* to coninue replicating such earnings growth forever. Even though it has produced oversized return during last 1 year, it's going forward return potential seems to be lesser than it's broad technology index. Also, being so concentrated is also prone to higher risk. iShares Russell Top 200 Growth ETF ( *IWY* ) might offer better diversification and higher earnings growth potential. We discussed it in past here:  https://financial-well-being.blogspot.com/2022/01/iShares-Russell-Top-200-Growth-ETF-IWY-Best-passive-index-ETF-for-large-cap-growth.html However, don't be surprised if,...

Recently came across Fidelity Fundamental Large Cap Core ETF (*FFLC*) which has been very nicely outperforming it's large cap blend index. For example, it's annualized total return of 17% for last 3 years is just *double* of it's index.  Even though it's *actively* managed, it's expense ratio of 0.38% is as low as other inexpensive passive index funds.  It's P/E of 20 is 10% cheaper than it's underlying benchmark. Also, it's long term earning growth potential of 11% is 10% higher than it's benchmark. So, it has 10% more potential for total return alongside 10% discounted valuation. Best of both worlds. It's investment strategy involves investing primarily in equity securities. Identifying *early* signs of *long-term changes* in the marketplace and focusing on those companies that may benefit from *opportunities created by these changes* by examining technological advances, product innovation, economic plans, demographics, social attitudes, and ot...

PGIM Ultra Short Bond ETF (PULS) is a good low expense (0.15%) ultra short-term total bond fund ETF. It invests into investment grade (AA rated) corporate and government bonds with effective duration of 3 months. It offers 0.50-1% better return than AAA rated ultra short treasury bond ETFs such as SGOV. I believe such extra return might be worth, in spite of little bit lower rating. It's going forward yield to maturity is currently 6.04% Updated on Jan 12, 2025: PULS has continued outperforming it's underlying index 4 years in a row. It returned 6.12% last year (we discussed about it last year in Feb) as compared to ultrashort index's 4.39%. Hope it continues it's outperformance this year too.  This AA rated ultrashort (currently less than 1 month duration) Total bond fund ETF seems to be much better option than most of short term bank CD or high yielding savings account or most of money market funds. As Fed has cut interest rate few times last year, it's going forw...

Someone asked me if I know any good ETF for AI stocks. I did some digging and sharing my findings below: One can look into *Themes Generative Artificial Intelligence (WISE) ETF*. It's inexpensive passive index which invests into companies that have (or are expected to have) exposure to the provision of products and/or services that contribute to AI related industries.  As compared to broad technology index, WISE is 10% more expensive with P/E of 30. Perhaps one can try *slowly* building position in it by buying on dip during future downward cycles. For this index, companies are only eligible if they generate at least 50% of their revenues from activities which make use of technologies such as Artificial Intelligence (AI), Data Analytics and Big Data, Natural Language Processing and AI-driven services. Expect lots of volatility for this cutting edge technology sector. This is how it's last 6 months chart looks like:

I believe *actively* managed Vanguard Core Bond ETF (VCRB) is better substitute to 2 decades old *passive* (market value weighted) Vanguard Total Bond Market ETF (BND). In fact, market value of a bond offering doesn't make any sense to be a criteria to allocate more weight (allocation of money) to that bond offering. That's one reason why actively managed bond funds have been outperforming passive bond funds. Normally actively managed bond funds have higher expense ratio, but VCRB is an exception with just 0.10% expense ratio. As such, above bond fund should be used only for long haul investing such as in IRA or 401(K). Since they tend to be interest rate sensitive, we should *avoid* them for short term savings such as emergency funds. Updated on Feb 15, 2025: It outperformed it's *intermediate term* bond index during last 1 year by 1% (5.31% vs 4.38). Going forward, it's expected to return 5.15% based on it's yield to maturity.  I am glad I switched all my intermed...

Recently I came across another *semiconductor* focused low cost index ETF which seems quite promising index. It's called SPDR S&P Semiconductor ETF ( *XSD*). Unlike iShares Semiconductor ETF SOXX ( https://financial-well-being.blogspot.com/2022/01/iShares-Semiconductor-ETF-SOXX-Passive-Semiconductor-technology-index.html ), which focuses primarily in *large* cap, XSD focuses into *small and mid* cap semiconductor companies of S&P Total index. It's *equal weighted* index and that's why it's average capitalization is in mid and small cap.Overall it's comparable or *even better* than SOXX. For example... - It's PE is comparable to that of SOXX - Dividend yield plus earnings growth of 16% as compared to lower 13% for SOXX - It's 3/5 year returns of 23/22% is 20% better than that of SOXX's 19/18%. It tracks *semiconductor small cap* sector which has been one of the top performer in technology sector with close to *20% annual return* for last 5, 10 an...

Going forward I am thinking to add an *Emerging* Asia Pacific market ETF called iShares MSCI India Small-Cap ETF ( *SMIN* ). It's *top performer* for last 3 and 5 years period with annual returns of 22% and 13% for this emerging market segment. With 22% long-term *earning growth* projections, it's expected to produce top long-term return. As *country specific* fund, it's certainly concentrated and is more expensive (0.75% expense ratio). However, unlike other top performer ETFs, it's focus is not specific to any hot speculative industry. Also, it's capitalization falls into *mid* cap (borderline large cap) range, making it less aggressive than typical small cap etf. It's P/E of 22 is 10% higher than typical India equity fund. However, it's long term earnings growth projection of 22% is 30% more than it's category. So it's total return potential is still way (20-30%) higher than typical India equity fund. I am planning to build more position into it...

iShares iBoxx Investment Grade Corporate Bond ETF ( *LQD*) seems to offer 1% better return than Vanguard Total Corporate Bond ETF (VTC). Also it's bonds are better rated (A as compared to BBB) and it's expense ratio of 0.140% is comparable. Vanguard Interm-Term Corp Bd ETF (VCIT) has lower quality (BBB instead of A) and is less diversified. Accordingly, it should have produced better performance (than LQD) due to these added risks. But, it hasn't.

iShares® 0-3 Month Treasury Bond ETF (SGOV) is ultra short term treasury bill ETF. It's expense ratio is near zero (just 0.07%) and it's latest (last 30 days) yield is 5.28%. Since it primarily holds US government bonds, this ETF is state and local tax exempt. Unlike CDs, there is no early withdrawal penalty. For saving money for emergency fund and short term goal expenses, SGOV seems like a good option. Since it is ultra short term bond fund, principal preservation is as good as any other money market fund.

Vanguard Total Stock Market Index etf (VTI) is ETF based on CRSP Total stock market model developed by top UChicago economists. It is a combined index of top 2500 stocks (based on market cap) representing almost 95% of the market cap of total stock market. Vanguard Total Stock Mkt Idx Adm (VTSAX) is underlying mutual fund for this ETF. If one wants to do automatic periodic monthly investment, one should buy VTSAX instead (as most of brokerage allow periodic investment in mutual fund only ). Money invested in a given company is proportional to their market cap weightage and so giant and large cap ones get most of money (70%) and rest goes to mid caps and small caps. S&P 500 based large cap stocks represent approx 70-75% of total domestic stock market capitalization and so investing into a mutual fund/etf based on this index provides a broad large cap  coverage for sure. However remaining 25-30% domestic stocks fall into mid cap (15-20%) and small cap (10-15%) market cap. ...

ETF  ProShares UltraPro QQQ (TQQQ) offers 3x ( T riple) daily long leverage to the NASDAQ-100 Index based Invesco QQQ Trust (QQQ) ETF . Using 3x leverage means that fund manager invests another ( borrowed  ) $2 for each $1 investors put in. This results into 3 times of index return in boom times like last several years. This all sounds great until market moves to crash  territory. All those gains as well as principal could be quickly wiped out during a crash. For example a 10-20% market correction  (which typically happens every alternate  year) would result into 30-60% drop in TQQQ. If one had doubled one's money in last couple of years, all that gain is wiped out with just a mild 15% correction. With such outsized  loss, one is likely to resort to panic selling  and so would miss out further during quick  recovery (typically 4-5 months for corrections). I strongly suggest to stay away from such souped up leveraged  investing. Savvy invest...

iShares Russell Top Growth ETF (IWY) is one of the best passive index ETFs for large cap growth asset class. It's quite inexpensive with expense ratio of just 0.20%. It has outperformed it's category by almost 25% for last 3,5,10 years period: Source: Morningstar Performance tab It's holdings are 12% cheaper (PE of 30 vs 34) than broad large cap growth index. It's projected long term earnings growth of 17% is quite comparable to that of it's index.  It's standard deviation of 18% is same as that of Total Stock index, even though it has outperformed   Vanguard Total Stock index by 50% in last 3,5 years period. Note that, as long term investor, my advice is to mostly stick with style-neutral broad market index. Styles come and go and those chasing today's hot style are mostly too late in the style game and eventually tend to lag.  As such, we can go for Large Growth factor bias for small portion of portfolio. My suggestion would be to go s...

GlobalX US Infrastructure Dev ETF (PAVE) seems to be a good choice to capitalize on Biden's infrastructure bill spending for next couple of years. It has performed very well in it's domestic infrastructure category, since it's inception 4 years back.  It's PE ratio is 20% lower than that of broad Total Stock index, even though its long term earnings growth projection of 15% is quite similar to that of Total Stock index. It's expense ratio of 0.47% is little bit on higher side though. However, it's comparable to expense ratio of focused asset class such as infrastructure. Source: Morningstar Portfolio view page This fund seems to have outperformed Morningstar Gbl Eq Infrastructure index big way by mainly focusing into small/mid size growth-value blend industrial infrastructure companies. Hope it's able to do same in future. Above outperformance does come with some volatility  risk (standard deviation 25% as compared to 16% for index). Key is...

For those considering a tilt  to specific technology  asset class in their portfolio, high PE of this asset class is always concerning. However, to my utter surprise, semiconductor  technology specific passive   iShares Semiconductor ETF (SOXX) happens to have dirt cheap  PE of merely 21 (as compared to 29 for technology heavy NASDAQ 100 - QQQ). Also, amongst all the technology asset class non leveraged etfs , SOXX performance is almost  number one  for all 1, 3, 5 years horizon. With dividend yield of over 1% and projected earnings growth of 17%, this ETF is projected to generate 1+17=18% annual return for next 5 years. It invests into ICE Semiconductor Sector Index which is primarily based on top 30 (based on market cap) global semiconductor companies. It's expense ratio of 0.43% is little bit on higher side. However, it's still one of least expensive focused technology index ETF.

Index based etfs are in general highly tax efficient as compared to it's mutual fund counterpart. It's because ETFs rarely generate any capital gain , even when index's underlying appreciated security is being replaced by another security. For example, VTI has not distributed any capital gain for it's 20 year's history, even though it has produced above 10% annual return during above period. Even during 2019 March selloff, there was no realized capital gain. For taxable accounts, it's better to own etfs than mutual funds, as taxes on deferred capital gains are deferred in etfs. Also, unlike mutual funds, there is no huge realized capital gains from other investor's panic selling during sharp downturn. There is no real outflow in case of etfs. Sellers sell shares and buyers buy them. Underlying securities remain unchanged .