The Best Investment I've Ever Seen

Summary

In 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

00:00

📈 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.

05:02

🏠 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.

10:04

🌐 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.

15:05

💼 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.

20:07

💰 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.

25:08

⚠️ 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.

Keywords

💡ETF (Exchange Traded Fund)

An ETF is a type of investment fund and exchange-traded product, traded on stock exchanges much like individual stocks. They are designed to track the performance of a specific index, commodity, bonds, or a basket of assets. In the video, the host emphasizes the benefits of ETFs, such as diversification, low entry cost, and automatic rebalancing, which he considers them to be the best investment ever.

💡Individual Stocks

Individual stocks refer to shares in a single company. The host mentions investing in companies like Apple, Microsoft, and Salesforce, but argues that while these can be good investments, they are not as comprehensive or low-risk as ETFs, which offer diversification across many companies.

💡Diversification

Diversification is an investment strategy that involves spreading investments across various financial instruments, industries, and other categories to minimize risk. The host highlights that ETFs automatically diversify your money into hundreds of companies, reducing the risk associated with investing in a single stock or sector.

💡Rebalancing

Rebalancing is the process of adjusting a portfolio to maintain the desired risk level and asset allocation. The host explains that ETFs are self-balancing, as they undergo periodic rebalancing to remove underperforming stocks and add new ones that fit the index's criteria, ensuring the portfolio stays up-to-date with the best investments.

💡Liquidity

Liquidity refers to how easily an asset can be bought or sold in the market without affecting its price. The host points out that ETFs have high liquidity, meaning they can be traded throughout the day like stocks, which is a significant advantage over less liquid investments like real estate.

💡Index

An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. The host discusses how ETFs follow indexes, such as the Dow Jones US Large Cap Growth Total Stock Market Index, which provides a way to invest in a broad market or a segment of it through a single security.

💡Growth Stocks

Growth stocks are shares in companies that are expected to grow at an above-average rate compared to other companies in the market. The host specifically talks about a Schwab ETF that focuses on US large cap growth stocks, emphasizing the potential for higher returns from these types of companies.

💡Dividend Stocks

Dividend stocks are shares in companies that pay out a portion of their earnings to shareholders in the form of dividends. The host mentions a dividend-focused ETF, highlighting the appeal of steady income for investors, especially those looking for more conservative investments.

💡Expense Ratio

The expense ratio is the fee that all funds charge their shareholders to cover the costs of the fund's operation. The host notes the importance of a low expense ratio in ETFs, as it impacts the overall return on investment. He contrasts high expense ratios of some actively managed ETFs with the lower costs of passively managed ones.

💡Covered Call ETFs

Covered call ETFs are a type of exchange-traded fund that uses options strategies to generate income. The host warns against these types of ETFs, explaining that they often sacrifice long-term capital gains for short-term income, which can lead to underperformance compared to traditional ETFs or indexes.

💡Risk-Adjusted Returns

Risk-adjusted returns are investment returns that have been adjusted for the risk undertaken. The host suggests that ETFs, with their diversification and rebalancing, can offer good risk-adjusted returns, making them an attractive investment option for various types of investors.

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