ETF
Investing
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Next Gen ETFs

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Interested in ETFs? Here I explore the basics of ETFs, some of my favorite Next Gen ETFs, and why any of this should matter to you.

The Basics

Why invest in ETFs?

Here might be a couple reasons why ETFs might help complement your investment strategy.

  • You are risk averse but would still like to increase your exposure to disruptive investments.
  • You are new to investing and are not sure what to invest in.

That being said, ETFs are a great tool for experienced and novice investors alike.

What are ETFs?

ETF stands for Exchange Traded Fund. There is a lot to learn about ETFs and a lot you could consider before making your first investment. If you want to take a deep dive into ETFs, I would recommend reading this Investopedia article about ETFs. In general, these are the most important things to consider prior to investing in an ETF:

  • The objective
  • The strategy
  • The holdings [Stocks owned by the ETF]
  • The cost structure

ETF Objectives can vary greatly from one ETF to the next. Objectives can include:

  • Generating income [E.g. SPYD]
  • Capital Growth [E.g. ARKK].
  • Tracking specific industries [E.g. Semi-conductor ETF XSD] or the market as a whole [e.g. VOO].
  • There are also less traditional ETFs such as leveraged ETFs, which amplify gains and losses through investing with debt [e.g. SPXL] , and short ETFs which go up when the underlying stocks go down [E.g. RWM].

ETF Strategies mostly fall into two categories. Actively managed or passively managed. It is important to identify your ETFs strategy because it directly impacts the cost structure. As you'll soon find out, the cost structure can have a massive impact on your returns throughout your life. An example of an actively managed ETF is the ARK Innovation ETF [ARKK]. The ARKK ETF buys and sells stocks nearly every week depending on current opportunities in the market and it is up to the judgement of the ARK team when and where to invest. An example of a passively managed ETF is the Vanguard S&P 500 ETF [VOO]. The VOO ETF invests in stocks listed on the S&P based on market capitalization and the ETF adjusts its investments every quarter to reflect changes in market capitalization.

ETF Holdings are mostly determined by the ETF objective and strategy. Experienced investors will want to ensure that the ETF is invested in their favorite stocks. Additionally, analyzing ETF holdings can provide a lot of valuable insight for new and experienced investors alike.

ETF cost structures can also vary significantly and it is perhaps the most important factor to consider when evaluating ETFs. Here are the main takeaways when evaluating cost structures.

  • Actively Managed ETFs tend to have more expensive cost structures (At the expense of greater returns, in theory.)
  • It is very important to understand the cost structure and identify any hidden fees.
  • Even a 1% annual fee can have a giant impact on gains over decades.

The Hidden Cost of ETFs

Although a 1% management fee may not sound like much, it could cost the average millennial $590,000 in retirement savings. The same article by NerdWallet, also made the following enlightening statement:

NerdWallet's analysis found that from ages 45 to 65, the loss to fees increases from 12% to over 25%.

How could this be? The answer is compound interest. In short, the same way that 6% annual returns can help you make a big retirement nest egg, a 1% annual fee can take a big chunk out of it. The worst part is that the costs are not intuitive.

  • The longer you are invested in an ETF, the bigger the impact the ETF fees have on your gains.

In short, the impact of annuals fees on long term gains is dramatic and it is important to understand your fees and do your best to lower them or eliminate them. One should apply this wisdom to all of their investments from ETFs to 401Ks. Here is John Oliver discussing the experience his show had when setting up a 401K plan and how they managed to catch very costly mistakes before it was too late.

Next Gen ETFs

Now that you know the basics of ETFs, here are my favorite disruptive ETFs.

Guggenheim Solar ETF [Ticker: TAN]

The Objective: TAN invests in solar energy companies located across the world, but predominantly in the U.S. and China. It has demonstrated strong returns and I believe it will continue to do so as renewable energy, led by solar and wind, will continue to replace fossil fuels as a form of energy generation.

The Strategy: Passively managed, rebalanced every quarter.

The Holdings: TAN has a large stake in Enphase Energy, which in my opinion, is one of the most disruptive solar energy companies. In addition, TAN has large stakes in other disruptive and high growth stocks. Lastly, TAN is heavily invested in some of the most promising markets for solar energy growth; mostly China and the US.

The Cost Structure: 0.69% Net Expense Ratio

First Trust Global Wind Energy ETF [Ticker: FAN]

The Objective: FAN invests wind energy companies across the world and is heavily invested in stocks that have proven to be leaders in the industry, and are likely to stay leaders due to massive barriers of entry. The ETF has demonstrated strong returns and I believe it will continue to do so as renewable energy, led by solar and wind, continue to replace fossil fuels as a form of energy generation.

The Strategy: Passively managed, rebalanced every 6 months.

The Holdings: FAN has one of the largest wind turbine producers, Siemens Gamesa, in its top holdings. Additionally, it has all of the other top 4 wind turbine producers within its top 10 holdings as well, giving it exposure to all of the fastest growing wind energy markets: North America, Europe and China. Additionally, within its top 10 holdings are companies that are leaders in critical parts of the wind energy supply chain such as TPI Composites which manufactures wind turbine blades using composites.

The Cost Structure: 0.6% Net Expense Ratio

AdvisorShares Pure US Cannabis ETF [Ticker: MSOS]

The Objective: MSOS invests exclusively in Cannabis companies operating in the United States. American Cannabis corporations have been demonstrating much stronger growth than their Canadian counterparts for much of 2020 and I expect this trend to continue as cannabis becomes more legalized throughout the US. Many of the top 10 holdings in MSOS on this platform and have demonstrated over 100% revenue growth YoY in recent earnings reports. For comparison, many of the top 10 Holdings in ETFMJ, an ETF tracking Canadian cannabis companies, have struggled to demonstrate any revenue growth throughout 2020.

The Strategy: Actively Managed, adjusts portfolio as opportunities arise.

The Holdings: MSOS holds several of my favorite cannabis companies in its top holdings. Additionally, MSOS appears to be heavily invested in a relatively small number of high conviction stocks, with over 40% of its portfolio dedicated to just 4 stocks (As of this writing), which typically provides investors with the potential for greater returns at the expense of more risk and volatility.

The Cost Structure: 0.74% Net Expense Ratio

ARK Genomic Revolution ETF [Ticker: ARKG]

The Objective: ARKG aims to generate long-term growth of capital by investing in various aspects genetics and associated technologies. Cathie Wood, manager of ARK funds and early investor in Tesla, recently said that of all of the disruptive sectors she expects genetics will generate the greatest returns in the next 5 years.

The Strategy: Actively managed and makes trades relatively frequently to take advantage of opportunities in the market.

The Holdings: ARKG holdings take advantage of various different disruptive technologies including, CRISPR, bioinformatics and stem cells.

The Cost Structure: 0.75% Net Expense Ratio

ARK Fintech Innovation ETF [Ticker: ARKF]

The Objective: ARKF seeks to generate long-term growth of capital by investing in financial technology innovation.

The Strategy: Actively managed and makes trades relatively frequently to take advantage of opportunities in the market.

The Holdings: ARKF holds Square as its top holding, currently comprising over 10% of its portfolio. It also has holdings spread across various disruptive technologies including blockchain technology, transaction innovation, frictionless funding platforms, and more.

The Cost Structure: 0.75% Net Expense Ratio

ARK Autonomous Technology & Robotics ETF [Ticker: ARKQ]

The Objective: ARKQ seeks to generate long-term growth of capital by investing in various disruptive opportunities regarding autonomous vehicles and robotics.

The Strategy: Actively managed and makes trades relatively frequently to take advantage of opportunities in the market.

The Holdings: ARKQ holds Tesla as its largest holding - currently comprising over 10% of the portfolio. Additionally, ARKQ has holdings across various disruptive sectors including, 3D printing, energy storage and space exploration.

The Cost Structure: 0.75% Net Expense Ratio

ARK Innovation ETF [Ticker: ARKK]

The Objective: ARKK seeks to generate long-term growth of capital by investing in the most disruptive opportunities across all sectors of public markets.

The Strategy: Actively managed and makes trades relatively frequently to take advantage of opportunities in the market.

The Holdings: ARKK can be thought of as the "general" ARK ETF because it contains the stocks found across all ARK ETFs. The largest holding is Tesla, currently making up over 10% of the portfolio, and Square is the second largest holding currently making up around 6% of the portfolio.

The Cost Structure: 0.75% Net Expense Ratio

Next Steps

Looking for a little more guidance? Next, I would recommend to identify your favorite ETFs and then determine the best way to incorporate them into your investment strategy. Due to the high volatility and risk involved with high growth disruptive investing, the only strategy I can generally recommend is [Exclusive]The Hands Off Approach.

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