The Best Investment I've Ever Seen
Summary
TLDRIn the Joseph Carlson show, the host discusses why ETFs (Exchange Traded Funds) are the ultimate investment, highlighting their advantages over individual stocks and real estate. He emphasizes the benefits of diversification, low entry barriers, and self-rebalancing nature of ETFs, and recommends specific ETFs like Schwab's US Large Cap Growth ETF (SCG) and the Dow Jones 100 Dividend Payer Index (HD), while warning against gimmicky or actively managed ETFs.
Takeaways
- 📈 The speaker believes that ETFs (Exchange Traded Funds) are the best investment ever, surpassing individual stocks and even real estate.
- 🏦 The speaker has a background in stock picking and investing in companies like Apple, Microsoft, and Visa, but still emphasizes the benefits of ETFs.
- 💼 The speaker manages two portfolios: a passive income portfolio and a growth-focused portfolio called the 'Story Fund', both of which perform well.
- 💰 The speaker has nearly a million dollars invested in individual stocks, but also invests in ETFs for retirement and custodial accounts, highlighting the importance of ETFs in a diversified portfolio.
- 🏘️ The speaker compares ETFs to real estate, noting that ETFs have lower barriers to entry, instant diversification, and are self-cleansing through regular rebalancing.
- 🌐 ETFs offer advantages over individual stocks and real estate, such as lower entry costs, the ability to add incremental capital, and automatic diversification across hundreds of companies.
- 🔄 ETFs are self-balancing, with indexes like the Dow Jones US Large Cap Growth Total Stock Market Index rebalancing every six months to remove underperforming stocks and add new ones.
- 📊 The speaker recommends Schwab's US Large Cap Growth ETF (ticker: SCG) for its historical performance, low expense ratio, and inclusion of top-performing companies like Microsoft and Apple.
- 💡 The speaker also recommends a dividend-focused ETF, Schwab's High Dividend Equity ETF (ticker: HD), for conservative investors looking for steady income and capital preservation.
- ⚠️ The speaker warns against gimmicky ETFs, such as those managed by Ark Invest or covered call ETFs, which may offer high yields but can destroy net asset value and underperform the market.
Q & A
What does the speaker consider the best investment ever?
-The speaker considers the ETF (Exchange Traded Fund) as the best investment ever, as opposed to individual stocks or other investment options like real estate.
Why does the speaker prefer ETFs over individual stocks?
-The speaker prefers ETFs because they offer diversification, lower entry barriers, and automatic rebalancing, which reduces the risk associated with investing in individual companies.
What are some of the advantages of ETFs compared to real estate investments?
-ETFs have lower entry barriers, allow for incremental capital addition, provide instant diversification, and are self-cleansing through periodic rebalancing, unlike real estate which requires a large upfront payment, active management, and carries concentrated risk.
What is the speaker's background in investing?
-The speaker is mostly a stock picker, investing in individual companies based on principles similar to Warren Buffett, focusing on cash flows and earnings growth.
What are the two portfolios the speaker manages?
-The speaker manages a passive income portfolio and a growth-centered portfolio called the story fund, both of which have performed well due to investments in high-quality companies.
Why does the speaker invest in ETFs in his smaller accounts like retirement and children's custodial accounts?
-The speaker invests in ETFs in these accounts because he believes ETFs are a good way to diversify and manage investments passively without the need to pick individual stocks.
What is the main feature of ETFs that the speaker finds most advantageous?
-The speaker finds the self-cleansing or rebalancing feature of ETFs most advantageous, as it ensures that the portfolio always contains the best stocks based on the index's methodology without any active management from the investor.
Which ETF does the speaker consider the best in the world and why?
-The speaker considers Schwab's US Large Cap Growth ETF (ticker symbol: SCG) the best in the world because it follows the Dow Jones US Large Cap Growth Total Stock Market Index, which has shown good historical performance and follows a robust methodology for selecting and weighting growth stocks.
What are the main characteristics of the Dow Jones US Large Cap Growth Total Stock Market Index?
-The index focuses on US large cap growth stocks, uses a mathematical and methodical approach to separate growth from value stocks, and weights companies based on their growth metrics and market cap.
Why does the speaker prefer the SCG ETF over the QQQ or NASDAQ 100?
-The speaker prefers SCG because it can invest in companies from both the NASDAQ and the New York Stock Exchange, unlike the QQQ which is limited to NASDAQ-listed companies, thus providing a broader and more diverse selection of growth companies.
What are the speaker's thoughts on covered call ETFs?
-The speaker is cautious about covered call ETFs, as they often destroy the NAV value of the fund to pay out high yields, which can lead to underperformance and higher expense ratios compared to more traditional ETFs.
What is the speaker's advice for investors considering ETFs?
-The speaker advises investors to be discerning, choosing ETFs with stable, predictable, and passively managed methodologies. He recommends avoiding gimmicky or actively managed ETFs that may not provide stable returns.
Outlines
📈 The Ultimate Investment: ETFs
The speaker introduces the concept of ETFs (Exchange Traded Funds) as the ultimate investment, surpassing individual stocks like Apple or Microsoft. Despite his background in stock picking and investing in companies based on Warren Buffett's principles, he emphasizes the benefits of ETFs. He mentions his own investment portfolios, the passive income portfolio and the story fund, which have performed well due to investments in high-quality companies. However, he highlights that ETFs offer a different kind of investment opportunity that he believes is superior in many ways.
🏠 Comparing ETFs to Real Estate
The speaker compares ETFs to real estate, arguing that ETFs are a better investment due to their lower entry barrier, diversification, and the self-cleansing nature of ETFs through rebalancing. He explains that real estate requires a large upfront payment, carries concentrated risk, and involves active management, whereas ETFs allow for incremental investment, instant diversification, and automatic rebalancing every six months, which ensures the portfolio remains up-to-date with the best stocks.
🌐 The Benefits of ETFs
The speaker discusses the numerous advantages of ETFs, including their low entry cost, liquidity, diversification, and self-rebalancing mechanism. He contrasts these benefits with the challenges of investing in real estate or individual stocks. ETFs are described as having an 'immune system' that automatically removes underperforming stocks and replaces them with better ones, making them a passive and hassle-free investment. The speaker also mentions that ETFs are difficult to beat in terms of total returns, making them an attractive investment option.
💼 Schwab's US Large Cap Growth ETF
The speaker highly recommends Schwab's US Large Cap Growth ETF (ticker symbol: SG), explaining its methodology and performance. The ETF follows the Dow Jones US Large Cap Growth Total Stock Market Index, focusing on US large cap growth stocks. The speaker appreciates the ETF's historical performance, its low expense ratio, and its ability to hold onto top-performing companies indefinitely. He also compares it favorably to other ETFs like the QQQ, highlighting its broader selection of companies from both the NASDAQ and the New York Stock Exchange.
💰 The Best Dividend ETF: Schwab's US Dividend Equity ETF
The speaker identifies Schwab's US Dividend Equity ETF (ticker symbol: SDY) as the best dividend ETF. This ETF follows the Dow Jones US Dividend 100 Index, focusing on US companies with a history of paying dividends and growing those dividends over time. The ETF is constructed by excluding REITs and selecting the top 100 companies based on a composite score that considers factors like free cash flow, return on equity, and dividend growth rate. The speaker appreciates the ETF's equal weighting approach and its focus on dividend growth, making it suitable for conservative investors.
⚠️ Caution Against Certain ETFs
The speaker warns against certain types of ETFs, particularly those that are actively managed or gimmicky, such as covered call ETFs. He criticizes these ETFs for their high expense ratios and poor performance, arguing that they destroy wealth rather than generate it. He specifically mentions the NASDAQ 100 Covered Call ETF (Q), which despite offering a high yield, has underperformed compared to the S&P 500. The speaker advises investors to be discerning and to choose ETFs with stable, predictable, and passive management methodologies.
Mindmap
Keywords
💡ETF (Exchange Traded Fund)
💡Individual Stocks
💡Diversification
💡Rebalancing
💡Liquidity
💡Index
💡Growth Stocks
💡Dividend Stocks
💡Expense Ratio
💡Covered Call ETFs
💡Risk-Adjusted Returns
Highlights
The speaker considers ETFs (Exchange Traded Funds) the best investment ever, superior to individual stocks.
ETFs are advantageous due to their lower entry barrier, allowing for incremental capital addition.
ETFs automatically diversify investments, reducing the risk associated with individual stocks or real estate.
ETFs are self-cleansing and self-healing, rebalancing every six months to remove underperforming stocks.
The speaker's background is primarily in stock picking, focusing on companies like Costco for their growth potential.
The speaker manages two portfolios: a passive income portfolio and a growth-centered 'story fund'.
The speaker invests in individual stocks based on Warren Buffett's principles of buying companies for their cash flow and earnings growth.
The speaker prefers ETFs for retirement accounts and children's custodial accounts due to their passive management.
ETFs offer advantages over real estate investments, such as lower upfront costs and less active management.
The speaker argues that ETFs are more accessible and less risky than real estate, making them a better investment for most people.
Schwab's US Large Cap Growth ETF (ticker: SCG) is highlighted as the speaker's top pick for its methodology and performance.
The Dow Jones US Large Cap Growth Total Stock Market Index is used by SCG, focusing on top-performing large cap growth companies.
SCG is favored for its inclusion of companies like Microsoft, Apple, and Nvidia, which are weighted heavily in the portfolio.
The speaker contrasts SCG with the NASDAQ 100, arguing that SCG's broader selection criteria make it superior.
Schwab's US Dividend Equity ETF (ticker: SDH) is recommended for dividend investors, focusing on US companies with a history of dividend payments.
SDH uses a composite score based on factors like free cash flow, return on equity, and dividend growth rate to select its holdings.
The speaker warns against gimmicky ETFs and those with high expense ratios, such as those managed by Ark Invest.
Covered call ETFs are cautioned against due to their potential to destroy NAV value and underperform compared to the S&P 500.
The speaker emphasizes the importance of choosing ETFs with stable, predictable, and passive management methodologies.
Transcripts
welcome everyone today on the Joseph
Carlson show I want to talk about what I
consider to be the best investment ever
in fact I truly believe this to be the
ultimate investment it's not an
individual stock and I know that I talk
a lot about individual stocks I talk
about companies that I think may be the
best companies in the world ones like
apple or Microsoft Salesforce into it
MasterCard and Visa I talk about all of
these companies and I invest in these
companies I've made decent gains buying
individual companies but I don't
consider any of these individual
companies to be the ultimate investment
or the best investment ever I believe
the best investment ever is the ETF the
exchange traded fund and I don't think
most people fully appreciate how good of
an investment an ETF is in fact I
believe that if more people actually
knew how good ETFs are and how they
really function as Investments I think
more people would be stuffing their
money into ETFs every chance they get I
think they'd be buying ETFs because of
how good of Investments these are the
first thing I think is important to
mention is my background I am mostly a
stock picker the majority of my money is
in individual stocks and like I've shown
repeatedly on my channels I make large
investments into individual companies I
invest in them based on the principles
of Warren Buffett buying a company and
earning returns through its cash flows
and its earnings growth so I'll buy
companies ones like cost Costco and earn
returns because Costco is gaining
members gaining earnings they're growing
their free cash flow um and you get
returns that way now I've done this on
two different portfolios I have the
passive income portfolio and then I have
my other portfolio called the story fund
which is more of a growth Center
portfolio but this one has also done
phenomenally well it's been a really
well performing portfolio because of the
concentration into very high quality
companies that are generating a lot of
cash a lot of returns for investors
so my background for the most part is
investing in individual companies making
bets on them and that's something that's
never going to change I'm always going
to be investing in individual companies
I love doing research I love making big
bets on companies big Investments and
sharing in the reward when these
companies have a a very financially
prosperous future between these two
accounts the passive income portfolio
and the story fund I have nearly a
million dollars invested into individual
stocks all of that money into a handful
of companies and that represents how
strongly I feel about these companies
but I also have a few other smaller
accounts I have a retirement account a
Roth IRA have a little 401K then I also
have some kids custodial accounts for my
children so I have a couple accounts
they're not nearly as big as these ones
but in those accounts I don't pick
individual stocks in those accounts I'm
investing in ETFs and in one ETF in
particular and I think this is a good
way to go about things I think most
people can benefit from having some or
in some cases the majority of their
money in ETFs you can make bets on
individual stocks and do that as a
portion of your portfolio but I think
ETFs are a nice place a really good
investment to have at least some if not
the majority of your money in ETFs and I
want to explain why most people don't
fully understand or appreciate the
mechanics of ETFs and what makes them so
good they are advantageous in almost
every way you can consider an investment
for example if we compare an ETF to
buying real estate a simple comparison
many people consider real estate the
best investment of all time I don't
think so I think an ETF beats it the
reason why is because when you buy a
piece of real estate when you buy a
rental property there's a couple things
you have to do first of all you have to
come up with capital you need a down
payment that requires a lumpsum payment
so you're saving up a large amount of
money in some cases3 $40,000 to get in
the door to be able to buy that property
then when you buy it you have a
concentrated risk in a single location
when you buy real estate you only have
one location you have to monitor that
location you have to get it rented that
takes active work so now you've taken on
a bit of a side job you have work that
you have to do on the side and in some
cases that can be quite a bit of work I
know I've had I've had real estate in my
family growing up so you have an active
job you have a lump sum payment you also
usually need a loan so you're taking on
some leverage which brings on additional
risk and then you're not Diversified you
only have one property that you need to
monitor throughout the life of that
property if anything happens to it if
the tenant break an appliance if
anything happens you're on the hook for
that you have to monitor that property
keep it rented or you have to sell it so
it is an active investment in every way
possible real estate can generate great
returns but there's so much more
involved with it and there's so much
more risk involved with it you can
compare that to an exchang traded fund
an exchang traded fund is a vehicle that
follows an index fund so we have
different companies like S&P Global that
create an index which is a routine
method of following stocks and then an
exchang traded fund is a different
method of following that index so when
you're invested in an exchange traded
fund you're basically investing in the
index through a proxy it sounds
complicated but it's actually pretty
simple there's many different companies
that offer ETFs you have Schwab you have
Vanguard you have Fidelity all these
different companies making ETFs and they
all typically follow very popular
indexes now there's numerous advantages
to following an index one of them is
that unlike real estate you don't need a
large upfront lumpsum payment to get
into it you can start buying ETFs
typically at like $50 or $60 per share
so every paycheck whether or not it's
$500 400 bucks you can start buying
shares of an ETF so the bar of Entry is
much lower than real estate you can add
in small amounts of incremental Capital
every single month and you can
continually add to it whereas if you buy
a piece of real estate you can't keep
adding to that property you'd have to
buy an entirely new property with an ETF
you can buy additional shares every
single week every single month the
incremental additional Capital to it
makes it an easy investment to dollar
cost average into the other thing is
that ETFs automatically diversify your
money again if you buy an individual
piece of real estate you got one
property you have all the specific risks
of that property if you buy an
individual stock you have one investment
there one company with specific risks
when you buy an ETF it automatically
diversifies that money into hundreds of
companies so with an ETF you already
have the advantages of ample liquidity
you can buy and sell it any time you
have a low bar to entry allowing you to
add incremental Capital fractionally
anytime you get additional money and you
have instant diversification these are
all massive advantages in any type of
investment but you also have another
advantage and I think that this one is
probably the most most misunderstood
advantage or at least the one that I
don't think is talked about the most and
that is the fact that ETFs are self-
cleansing they are selfhealing it's what
they call rebalancing every 6 months
most indexes go through a process called
rebalancing where they look at their
methodology for picking stocks they do
analysis on all the Holdings they have
and they remove any holding that no
longer fits into that methodology that
no longer fits in their framework they
replace it with one that does fit in
that framework this is rebalancing it's
a reconstitution of the entire index
they look through it and they remove
stocks and they add in new ones the new
ones better represent what the
methodology fits and they do this behind
the scenes passively the index
automatically rebalances every 6 months
so the ETFs automatically rebalance
every 6 months they remove out all the
bad stocks and they bring in new good
stocks this means that no matter what no
matter how long you go you always have
the best stocks in your portfolio you
always have ones that at least are
represented in the methodology of the
ETF and you do this without any work at
all so again if we go back to investing
in real estate or owning a property you
just have that one property if you want
to make changes you have to make changes
you have to go and sell that property
and buy a new one you have to run into
problems with liquidity with going
through a whole sales process with
picking out a new investment with an ETF
it's completely passive you literally
don't do anything they rebalance your
entire portfolio without you doing a
thing you don't even know about it and
if you have a good ETF with a good
methodology this results in you always
having the best investments in your
portfolio at a given time a way that I
look at it is it's almost like an
investment that has an immune system
where if you run into any bacteria or
infection or disease your immune system
will fight it off it will self- cleanse
the problem in this case if you have
some company companies that perform
really poorly in an ETF or an index if
they have fraud if they have really poor
decisions if they're doing poorly as a
company the index rebalances pushes
those bad companies out of the index
replaces them with good ones this is the
self-cleansing nature of an ETF ensuring
that your Investments always stay on
track without you doing any active
management whatsoever so to summarize
when you look at the benefits of an ETF
it's pretty remarkable and this is why I
consider it the best investment of all
time the ultimate investment I can't
think of any other investment that has
this many good qualities that's this
passive that's this hassle-free it has
incredible liquidity low bars of Entry
instant diversification it's
self-cleansing self- rebalancing and
continues on forever and ever it is the
ultimate investment and on top of that
ETFs are incredibly difficult to beat in
total returns some of the major indexes
are so difficult to beat that most
investors cannot beat them through real
estate or through stocks they are tough
to beat so you have a very good
investment here but it is dependent
somewhat on the specific ETFs you pick
because not all indexes are created
equal and not all ETFs are created equal
so what I want to do is go through
examples of two ETFs that I think are
the very best and then also go through a
couple ETFs that I would personally
avoid and number one we have an ETF that
I consider to be the best in the world
and this is the one that I have all of
my secondary accounts in my retirement
accounts my kids cuz sto deal accounts
if I wasn't investing in my portfolio if
I was to sell all of my stocks and put
it into an ETF 100% of it would go into
this ETF that's how much I like it it is
Schwab's us large cap growth ETF the
ticker symbol is
SG this is a Schwab ETF but Schwab is
not the one that makes the index again
ETFs are vehicles to invest in that
follow an index the index is the Dow
Jones US large cap growth total stock
market index this is an index created by
the Dow Jones which is a company S&P
Global if we look at this index from Dow
Jones and see how it's constructed and
the methodology and the performance we
can see that this thing has had
incredibly good performance over the
past 10 years it's returned 16.68%
annualized it's a very good annualized
return but obviously looking at
historical performance is always tricky
what if it performed well historically
but it's not going to do well in the
future well the way that I determine
whether or not something's going to do
well in the future is the methodology
looking at how they construct their fund
and how they pick companies and how they
waight these companies when we look at
this one we can see from the name of it
there's a couple implications it's us
large cap and growth so we know that
it's going to be us only stocks they're
going to be larger stocks and probably
10 billion market cap and it's a growth
ETF not a value ETF now this is still
very vague what does all of this mean
well luckily for us they go through and
highlight specifically how they pick
their stocks and how they waight them
for example this right here is from the
Dow Jones and it explains the
intricacies the details of how they
separate growth from value so you have
these vague terms value and growth which
can mean a lot of different things this
is actually how they Define It This Is
How They separate it a stocks style
classification growth or value is
determined by the company's performance
in terms of six measures two projected
two current two historical projected
price to earnings ratio based on the
Stock's closing price at the time of the
annual review and its mean annual
expected EPS over the next fiscal year
so one of the ways they determine
whether or not the stock is a value
stock or growth is the projected price
to earnings ratio they continue on
saying the projected earnings growth so
they factor in the rate at which the
company's growing earnings The Price to
Book value the dividend yield the
trailing Revenue growth and the trailing
earnings growth so they look at all
these factors and then based on that
they separate stocks into two different
baskets one of them being growth one of
them being value now once they're done
separating growth from value in this
very mathematical and methodical way
they move on to index construction and
this gets even more it gets more nuanced
and more mathematical they basically go
through a process of removing all
outliers they do this by a mathematical
formula they normalize a lot of metrics
and then they wait the companies based
on these different factors the ones that
are growing the fastest the ones that
have the biggest market cap are weighted
the largest and then as you'd suspect
the ones that are growing the slowest
and have the smallest market cap are
weighted lower down so you have the
waiting and the construction of this
portfolio now if we look at how this how
this actually works out you have a
portfolio that is heavily weighted
towards the top performing large cap
growth companies the company that this
index in SCD considers the best
investment Microsoft Microsoft is 12% of
the portfolio then you have apple at 11%
you have Nvidia at
11.5% Amazon at 6.5 and then you have
the two Google tickers the two alphabet
tickers at around 7% you have meta at
four you have broadcom at 2.7 you can
see how topheavy this is
now topheavy in this situation I don't
think is a bad thing I really like ETFs
that continue to invest in the biggest
winners and continue to hold those
companies I believe the reason why these
ETFs continue to do so well is they
continue to hold the winners and wait
them bigger and bigger following the
winners typically works out to be a good
thing I believe the reason that small
cap ETFs small cap indexes and midcap
indexes aren't doing as well is the
winners graduate out of their index
index and they move into the large cap
when you get into the large cap there's
nowhere for these companies to go they
never graduate out of this index if
Microsoft continues to double and double
again scg will continue to hold it as a
top holding it won't graduate and move
on to a different index so this is the
reason that I favor large cap indexes I
like the fact that they hold on to the
winners indefinitely that companies
don't graduate and move out of them and
not only that I think that the GL
nature of business today the fact that
companies like Microsoft and Apple can
do business literally anywhere means
that there's far more growth Avenues
than there were 50 years ago so these
companies are going to continue to grow
for a long period of time we move down
the list it has companies like Tesla
United Health Group great compounder we
have Visa Costco MasterCard and Netflix
notice why I like this ETF so much it
has so many great companies in it these
are compounding machines it rules out a
lot of the slower growing companies for
example it doesn't have Berkshire in it
it just is growing a little too slow but
you have companies like Adobe Salesforce
thermofisher scientific into it these
are a lot of the names that I hold this
is the reason that if I wasn't investing
in my portfolio this would be the ETF
that ID pick now there's different
companies that I disagree with for
example I'm a little nervous about
nvidia's valuation I also am a little
bit nervous about Tesla with their
valuation and the Reliance on full
self-driving so these are companies I
wouldn't pick myself but the purpose of
an ETF is to detach yourself and have it
be completely passive to have no biases
to have it all be completely
mathematical by a set criteria and then
to set it and forget it that's the magic
of an ETF now one thing I want to point
out a lot of people will say Joseph why
do you pick scg over the QQQ or the
NASDAQ 100 isn't this basically the same
thing as the QQQ it's not and I actually
believe that this is superior to the QQQ
for a few different reasons the biggest
reason why is because the QQQ can only
invest in companies listed on the NASDAQ
so if you're investing in the QQQ it has
an artificial limit a constraint on
where it can feed its investments from
all of it comes from the NASDAQ 100 the
QQQ can never invest in companies from
the New York Stock Exchange even if
those companies from the New York Stock
Exchange were just as good even if they
were compounding machines and fast
growing companies and technology
companies they could not be added to the
QQQ because a QQQ cannot select
companies from the New York Stock
Exchange so you artificially and biasly
get rid of a group of companies that are
excellent companies two examples of this
is Mastercard and Visa if we look at two
of the top Holdings
ofg this selects visa and MasterCard
these are two great technology growth
companies with wide modes their doopy
and and they are excellent Investments
these are two companies I love owning
scg has them in this ETF whereas if you
look at the Holdings list of invesco's
QQQ you will not see Visa MasterCard I
can search for it here no Visa no
MasterCard doesn't exist those companies
aren't in this index because Visa is
listed on the New York Stock Exchange
and MasterCard both of these are nysse
stocks therefore the QQQ cannot add them
to their index even though these are
incredibly good companies and better
than many if not most of the companies
in the QQQ they're better growth
companies than many companies in the QQQ
now the QQQ is great I think it's a
great index it has lots of top Holdings
of big Tech but I just like the fact
thatg can add companies from both the
New York Stock Exchange and the NASDAQ
100 it has a bigger area to select from
so it has a better more full collection
of companies that are excellent growth
companies so overall scg is my top pick
for investors wanting to invest in a
group of compounding machines without
doing the specific work of picking them
out it has incredibly good historical
performance it has a very low expense
ratio of
0.4% that's super cheap it has ample
liquidity you'll have no problem buying
and selling the CF and I think it will
go on for a long period of time I don't
think just the historical performance is
good my opinion is that future
performance will be good now there's no
guarantees nobody can guarantee future
performance but as long as the US econom
economy does well and the top companies
in the world seem to surface in the US
this CTF I think is going to do well so
I would be fine putting the majority if
not all of my money into the CTF and if
I wasn't investing in a lot of my
individual picks which are very similar
I would be picking the CTF now let's go
ahead and move on to number two this
one's for the dividend investors this is
what I consider to be the all-time best
dividend ETF it's
SD so chg is for growth HD is for
dividend both of these ETFs are offered
by Schwab but the index that they follow
is created by the Dow Jones by S&P
Global and as you'd suspect this is a
us-based dividend Equity ETF meaning
that they're not doing any covered call
options there's no funny business going
on this is just us companies that pay
Hefty dividends that are also growing
their dividends over time if we look at
the way that this index is constructed
it's pretty simple but it's a step
by-step process first of all the people
constructing this index they look at the
entire universe of stocks within the us
so you have the Dow Jones US broad stock
market index that's another index that
holds basically every stock in the US
and then they exclude REITs so we don't
want Reit in this index dominating all
these dividend players we want pure
equity in non-re companies or normal
companies the stock must pass through
the following screens so first of all
they look if the company companies have
a minimum of 10 consecutive years of
dividend payments right off the bat they
exclude a ton of companies so you first
start with every company then you see if
they have 10 years of dividend payments
not dividend growth just consecutive
years of dividend payments you have
different liquidity requirements like
trading requirements uh different market
cap requirements then they start going
through the mathematical formula for
different parts of the company they
don't only want to see that the company
has paid a dividend but they also want
to see other things like like if the
company has a decent balance sheet if
the company can continue to pay
dividends they first start off by
looking at the free cash flow to total
debt that's looking at the stability of
the company the balance sheet the
situation they're in they look at the
return on Equity a ratio showing how
good the company is with profitability
you look at the dividend yield of the
company they look at the 5-year dividend
growth rate defined as this big long
formula looking at the dividend growth
rate over the past 5 years the four
ranks are summarized to create a
composite score and the eligible
Securities are ranked based on the
composite score then they take the top
100 rank stocks in this composite score
and they include those in the index
that's how they make up the Dow Jones
100 dividend payer index now the top 100
stocks make up the index and they'll
stay in this index as long as they don't
fall below the top 200 so getting into
this index originally is more difficult
than getting kicked out of it they have
to be a top 100 to get in it they have
to be outside of the top 200 to get
kicked out non-constituent stocks are
added to the index based on their
ranking until the constituent count
reaches 100 this is where they rebalance
and they have the reconstitution of the
index and at the end of this you have a
pretty good collection of divid and
growing stocks that's why the companies
do well that's why this index does well
and again if they don't if they have
underperformance and they fall out of
that top 200 constituents then they get
kicked out they get rebalanced kicked
out and replaced with new companies now
when we look at the portfolio there's an
important thing to mention here this is
an equal weighted portfolio so they
don't weight it by market cap they just
start every company around 4% and then
they'll go up a little bit if they
perform well they'll make a bit of a
bigger bigger portion of the index if
they perform poorly they'll go down now
it rebalances every six months so again
they'll sell off the winners they'll buy
more of the losers that's something that
I don't necessarily love but overall
equal weighted indexes haven't done so
bad histor Al in this market it's more
topheavy there's companies like Nvidia
you know Apple Microsoft pulling up the
market but historically equal weighted
indexes have performed quite well and
this is a great equal weighted index
that's dividend growing companies that's
a bit more conservative overall I think
CHD this dividend growth index is really
good for investors that want to be more
conservative they don't want a lot of
their money in big Tech they maybe have
felt that big Tech has pushed up too far
you're nervous about valuations you want
to conserve a bit more of your money I
think this is a good ETF for very
cautious or conservative investors that
want to focus more on Capital
preservation and conservative more value
oriented bets than large growth plays
and compounding machines like you find
in chg but again I believe scg is the
best dividend growth ETF in existence so
there's two ETFs that I think are the
best in their category they follow
stable predictable and I think very
intelligent methodology that has led to
very good risk adjusted returns but
there's also ETFs that I think are are
bad they're gimmicky or they destroy
wealth in some cases they're ones that
are actively managed you have ETFs
managed by people like Arc Innovation
Ark invest ETF is picking stocks
haphazardly without any type of set
methodology it seems like they're just
shooting at the hip and their
performance has shown it's been
incredibly poor performance on top of
that they charge incredibly High expense
ratios so the manager of these ETFs are
getting rich while they're destroying
investors Capital these are bad ETFs so
don't believe just because something's
an exchange traded fund that it's a safe
or good investment you have to be
Discerning between the good ones and the
bad ones the good ones have stable
predictable passively managed
methodology the bad ones are actively
managed by people that take on great
risk and don't have stable or
predictable
methodology another group of ETFs that I
think is very popular online and one
that I would caution against
are covered call ETFs these ones attract
a lot of investors especially dividend
investors because of the juicy yield
everyone loves to look at yield you just
love looking at these big numbers these
big payouts it lights up those
endorphins I understand it I get it but
covered call ETFs I think deserve a word
of caution we have some popular ones
here like the NASDAQ 100 covered call
ETF Q this one has such an incredible
yield we look at what this pays out
every month and it pays out 11% that's
the annual yield but it pays that out
every single month so if you're
investing in this ETF you're getting
like 1% back per month that seems
incredible you're getting such a massive
yield from this ETF I understand the
alert of a juicy yield paid out on a
monthly basis it's rewarding to see the
money come in but it's more important to
understand what's going on behind the
scenes in most cases cover call ETFs are
destroying the nav value of the fund
toay pay out the ETF meaning that they
cannot generate this type of yield
they're not generating this from
earnings or from cash flow they're
generating it from contracts and from
destroying the nav value of the fund
which means you're basically sacrificing
all the upside of your Investments to
get this money paid back to you and in
most cases that actually destroys value
it does not generate value and ETFs like
this are never going to generate Alpha
they'll never beat the S&P 500 you can
mark my words try to find any ETF like
this that outperforms the S&P 500 over a
10-year period you're not going to be
able to do it the s&p500 has crushed
every single cover call ETF in existence
since its Inception you can name off any
of them and unless you try to really
nitpick a specific short time period the
S&P 500 is going to win because these do
not generate Alpha and I don't see much
of a situation where these are
beneficial to the huge majority of
investors
so when I see it as a very popular thing
for investors to put a lot of their
money in this especially young investors
I just I I cringe a little bit it's hard
for me to see so much money going into
these instruments when it could be used
in compounding machines in companies
that are growing earnings pure equity
and not these ones that destroy value to
prove this point further we can look at
the total returns of Q and compare it
against the S&P 500 since Inception this
is what the returns look like and this
is with the dividends reinvested so this
is with that juicy 11% yield reinvested
back into the portfolio over this time
period the S&P 500 which is in teal hair
has crushed Q it hasn't even been close
it's overd doubled the performance since
this short period of time and this is
not unusual I see this type of thing all
the time with covered call ETFs and
worse yet this underperformance by these
cover call ETFs is closely matched by
their higher expense ratio the expense
ratio for qld is 61% over half a percent
is a meaningful amount so you have part
of your money being eaten up every
single year by the expense ratio whereas
you can buy the S&P 500 you can buy scg
for again around
0.4% so ql is orders of magnitude more
expensive to invest in while giving you
far inferior performance I don't think
these are good Investments I would avoid
them the best investments are ones that
are methodical predictable and
repeatable ones that aren't gimmicky
they're not managed by third party
managers getting rich off of charging
you high expense ratios they invest pure
Equity pure ownership of companies in
growing economies there's no contracts
no options no other different complex
things associated with them so the ETFs
like scg the ones like the S&P 500 the
QQQ that own a basket of the best
companies in the world are continually
probably going to do the best in the
world now nothing is guaranteed there's
always a chance things could be
different but this is what I've seen
over the past 15 years of investing so
take that for whatever it's worth that's
my thoughts on the subject see you in
the next one
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