The All Stock Power ETF Portfolio
An ETF or exchange traded fund is an investment security that tracks an index, bonds, commodities, stocks, or a mixture of different assets. ETFs trade on stock market exchanges like common stocks do, and experience daily price movements as stocks do, as opposed to mutual funds. Since investors can buy and sell ETFs throughout the day they come with trading fees, which are cost efficient compared to most mutual funds that carry recurring management fees.
The use of ETFs has exploded since the early 2000s. More investors have turned to them for a long-term broad market option similar to the S&P 500. In addition, investors have flocked to ETFs over mutual funds because the return on investment potential is no greater with a managed mutual fund than an ETF. In fact, there are numerous ETFs outperforming so-called expert portfolio managers.
The expansion of ETFs has been a winner for the middle class investor. High asset level mutual funds seek high net worth individuals to invest within their fund simply to earn a higher management fee based on the fund’s recurring fee percentage. But ETFs have risen as a great source for low-cost diverse investment options. This allows everyday investors to buy and sell broad market or sector specific funds at a fraction of the cost.
The leading reason for investors driving towards ETFs over single stocks is the basket of sector specific or diversification it provides. For example: when an investor purchases the Technology Select Sector SPDR ETF (Symbol: XLK), they are getting a piece of action on big name tech companies such as: Apple Inc., Microsoft Corp, Facebook Inc., AT&T Inc., Alphabet Inc., and many more tech leaders. You may not own each stock directly, but the success of the stock price will have success for the overall ETF, and your portfolio.
Exchange traded funds can be set up with many different combinations of bonds, cash, currencies, commodities, stocks, or any asset class. A combination of assets is never a bad approach to investing as the level of risk taken on is moderate. However, at this time we will focus on the ETFs that consist of at least 99% stocks. This will allow us to select a number of powerful ETFs that are in position to flourish based solely on the group of individual stocks placed together.
Because ETFs have a resembling to a traditional portfolio in regards to the stake of each asset in relation to the overall portfolio, the top assets will tell the story. With ETFs there will be a holdings list showing the percentage of each stock as weighted to the overall ETF. The top holding position may have a 10% share of the ETF or there could be an equal split of 5% for the top five holdings.
As always it can be a wise move to check out similar ETFs to compare the assets, the weight of holdings, diversification of industries, and maybe how well they all have performed. Of course past performance is not a determination of future results, but it can help to gauge which type of combinations of assets that have executed well together.
Constructing the Portfolio
There are many ways to approach the construction of an ETF portfolio. One can aim for sector, industry or product specific. Broad sector specific areas could be technology or financials, while industry specific could be telecommunication or large national banking. Either way can be a productive portfolio to select. Going too specific may increase risk as that particular product could only be performing well within one or two companies, while others struggle, resulting in a negative or moderate gain.
A great series of sector specific ETFs are the select SPDR ETFs. They compile the top companies within each sector, and then create a weighted value for each stock’s holding percentage of the overall ETF. The stronger the company, the higher their holding stake will be. These ETFs have proven as successful investments over their period of existence.
Here are some of the notable select SPDR ETFs, their top five holdings, and how each has performed over the past five years.
Symbol: XLK – Technology
• Apple Inc. – 13.80%
• Microsoft Corp. – 10.72%
• Facebook Inc. – 6.51%
• AT&T Inc. – 5.52%
• Alphabet Inc. Class A – 5.18%
3 Year Return – 14.98%
• 2016 – 14.81%
• 2015 – 5.62%
• 2014 – 17.75%
• 2013 – 25.98%
• 2012 – 15.47%
Symbol: XLY – Consumer Discretionary
• Amazon.com Inc. – 13.42%
• Comcast Corp. Class A – 7.43%
• The Home Depot Inc. – 6.93%
• Walt Disney Co. – 6.70%
• McDonald’s Corp. – 4.21%
3 Year Return – 12.23%
• 2016 – 5.87%
• 2015 – 9.93%
• 2014 – 9.49%
• 2013 – 42.74%
• 2012 – 23.60%
Symbol: XLI – Industrials
• General Electric Co. – 9.30%
• 3M Co. – 5.15%
• Boeing Co.- 4.68%
• Union Pacific Corp. 4.57%
• Honeywell International Inc. 4.55%
3 Year Return – 10.48%
• 2016 – 19.93%
• 2015 – (4.27)%
• 2014 – 10.44%
• 2013 – 40.44%
• 2012 – 14.86%
Symbol: XLF – Financials
• Berkshire Hathaway Inc. Class B – 10.89%
• JP Morgan Chase & Co. – 10.58%
• Wells Fargo & Co. – 8.90%
• Bank of America Corp. – 8.00%
• Citigroup Inc. – 5.56%
3 Year Return – 12.98%
• 2016 – 22.55%
• 2015 – 1.60%
• 2014 – 15.02%
• 2013 – 35.37%
• 2012 – 28.53%
The ETFs listed above consist of purely stocks from large market cap companies and industry leaders. The holdings within each fund are selected by expert portfolio markers to develop the best possible sector specific investment. With all four ETFs shown returning double digits over the past three (3) years averaged, it is safe to say the committee creating the funds is doing a great job for investors.
Say you have interest in more than one company, but do not have enough cash to acquire a reasonable amount of shares in each. These ETFs provide the opportunity to have a piece of action in multiple companies while maintain a strong collection of options that have shown consistent returns over the years. Of course these are not the only ETFs available; however, their performance over the years has demonstrated the value they can provide to investors of any capital level.
Exchange traded funds are not mutual funds, we know, rather a strategic option for investors to benefit from numerous industry, sector, or asset plays, while saving money on trading fees. Due to its flexibility and zero management fees, ETFs are just another smart way for beginning investors to get started. The four aforementioned funds stated here are validated options for ETFs that contain strictly stocks to provide investors both growth and value opportunities.