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IFB181: Comparing 3 Growth ETFs from Schwab, iShares, and Vanguard

Investing in ETFs is a great way to build a core portfolio, plus it can allow you to invest in sector where you might not have a circle of competence, but want to get exposoure.

In today’s episode, Andrew and Dave discuss some of those options plus how important the price you pay matters.

A few concepts covered in today’s episode:

  • Where to research any ETF
  • What kinds of metrics or specifics to investigate
  • How to determine what companies are part of a ETF
  • Looking at the importance of secular trends
  • Dissecting the importance of the price you pay matters

For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com

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Transcript

Announcer (00:02):

I love this podcast because it crushes your dreams and getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern, a step-by-step premium investing guide for beginners. Your path to financial freedom starts now.

Dave (00:32):

All right, folks, welcome to the Investing for Beginners podcast. Tonight is episode 181 tonight; Andrew and I will answer a great list of questions that we got recently. And we’re also going to talk a little bit about a few of the things that we had in our minds. So I’m going to go ahead and read the first question and then Andrew and I will do our little give and take. Here we go, dear, sir; my question has to do with a desire to increase my exposure to a broad range of the top tech stocks through ETFs. My current major ETFs are generally large, mid-sized caps and a generalist and international all with decent dividends in the era of new returns on cash; however, with a rearrangement of S and P missing sectors, the top mega tech stock growth. So I’m looking at large-cap growth, ETS with low costs, but wonder how one chooses, which such as SCHG versus VUG versus iShares, you of which I’ve seen all of which I’ve seemed to miss 20% gains as I’ve been weighing how to choose the better of the trio or others.

Dave (01:39):

The dividend yield seems marginal, but that’s okay. These will be invested for my heirs, not money for me. Hope to hear her reply in the podcast at Gordon, from Iowa. Andrew, what are your thoughts?

Andrew (01:52):

Have a ton of thoughts on these first; let’s answer Gordon’s question and talk about some of the differences between these ETFs. So to recap, these ETFs are all growth ETFs. You have SCHG, which is from Schwab, and they call it the Schwab us large-cap growth ETF. You have VUG. This is an I-Shares core S and P U S growth ETF. And you have VG, which is Vanguard’s growth ETF. Now I took a look at these Dave, and I was talking back and forth about some of the differences. Their portfolios look very, very similar. So you have anywhere between 45 to 55% of the ETF itself and the technology space. So I’ll take the VG, which is Vanguard’s ETF. For example, they talk about using six growth factors and took the large-cap, mid-cap stocks. So talking about

Andrew (03:01):

Probably anywhere from 10 billion up, maybe even 20 billion could be 30 billion in market cap. So they have some of the most popular names. We’ve all heard of Apple, Microsoft, Amazon, Facebook, Alphabet, Visa, NVidia, Tesla, and Home Depot. What I found interesting was there was no Netflix on there. So I don’t know the answer to this. I’m sure it’s pretty easy to find out. You wonder if Netflix was in there a year ago, two years ago, and you wonder when you buy something like this, you have to think about how often are they changing these positions over because, you know, when you buy, let’s say you buy a Vanguard growth ETF. And based on this website here, they’re talking about how the company updates once a month. So if you were to buy, let’s say, an S and P 500 ETF, that one would relatively stay the same and would only change as the index adds or removes companies from the index with, with something, with an ETF like this, they’re saying they’re using fundamental factors.

Andrew (04:19):

And so that means if a company doesn’t meet those growth requirements, they’re probably going to boot it out of the index. So I think that’s something that’s just kind of to start as an observation, looking in as somebody who doesn’t generally do theme type ETF, investing something to consider that I think maybe it gets lost on people could be this idea that the portfolio is going to turn over a lot. Stocks are going to go in and out. And you might see that happen a lot more than you would think that an index should do, especially because I think a lot of people think of ETFs as like an S P 500 index or a Dow ETF or something like that, where it’s tied to an index that doesn’t change that much for me, or the year these look like they could change monthly or quarterly.

New Speaker (05:17):

And that would just be a feature of the ETF.

Dave (05:21):

Yeah, that’s a great insight into that, that ETF and looking at the, I share one, just for an example some of the things that kind of stuck out to me as we were kind of working through, looking at some of these ETFs that, that Gordon was asking us about, for example, the I-Shares one has the highest expense ratio of the three. It also seems to have the largest amount of holdings of the three, and it also appears to be the lowest as far as assets under management. And it also has the lowest returns of the three. Now, I

Dave (05:58):

I think the highest was the Vanguard one, which would have returned around a little over 37% for the year. So far, or Schwab, I think it was around 35. And the I-Shares is around 29, a little over 29%. So based on the, I guess, yearly returns, the I-Shares one seems like probably the loser of the three, if you will, although turning down 29.9% is still, that’s kind of hard to, to think about, but the expense ratio is, you know, it’s fractionally higher than the other two. It’s, it’s very, very small, but still, it is higher. One of the things that I think when you’re thinking about how these, all these ETFs work that was a great observation by Andrew, that Netflix was not among those companies. And I guess those are kinds of questions that you’d want to ask now.

Dave (06:51):

And the reason why I bring that up is that Gordon mentioned that in his question that he feels like he’s missing out on some of the tech stocks out there that are not included in the ETFs. And so he’s looking at trying to add some of these to his, I guess, mix to see if he can try to capture some of those gains that he, that he might’ve missed. Now, you always have to keep in mind with any ETF, a lot of them, I guess, I don’t know most of them. I now keep in mind. I’m going to say that I am coming from a tad bit of ignorance because I am not an ETF person. I have a vague idea, and I have more than a vague idea. I have a general idea of how they work and understand their goals; by and large, ETFs, I think, is meant to track another index. Is that correct?

Andrew (07:44):

Well, there, there are so many different TFS, so like this, this one is like a multi-factor, so they’re going to set in the algorithm basically, and it’s almost like the algorithm is going to pick it. Okay. Or you can have sector ETFs where they’re just going to Buy airline stocks.

Dave (08:02):

Gotcha. Okay. All right. Fair enough. I don’t know that this is always going to, I guess I guess my point with all this is that I don’t feel like this will fix what he’s hoping to fix. And I think that’s something that we can talk a little bit more about here in a little bit, but one of the things to keep in mind with ETFs is a lot of times, depending on how they’re set up, they may or may not get you where you want to go. So that’s something to keep in mind. One of ETFs’ advantages is that they can be a little bit of set it, forget it kind of thing, where you can keep buying into them. Now, most people are probably familiar with ETFs based on their 401ks. If they have a 401k at work, they have the opportunity to buy different things in their 401k and ETFs, as well as mutual funds are going to be probably A large portion of those choices. And so the different ETFs, as Andrew said, they have sector, and they have different ideas and goals that they’re going for, which will allow you to just kind of set it and forget it. You buy a dollar-cost average into it as you do with a 401k, and you kind of call it a day. So that’s, I guess, the strength and advantage of ETFs.

Andrew (09:18):

So I guess I’d like to talk about that a little bit more. Maybe you can talk about an alternative, maybe more specific to Gordon’s question. Okay. I know a great advantage of an ETF is adding exposure to something you have no circle of competence. So Andy Schuler did a great blog post on, on our website where he talked about how cloud computing was something that he wanted to be into that trend and, and get exposure into that industry and into that secular growth pattern because it’s, it’s, it’s quite obvious that consumers are using more data companies are collecting more data. All that data needs a place to be store that.

Andrew (10:05):

And so the cloud stocks, a lot of those benefit from that development. And so having exposure to that is away from the, to play that theme. And so Andy writes how not, not being somebody who’s just trying to learn about cloud stocks, having an ETF where you can buy that ETF rather than investing in a stock that you know nothing about. And all you know is that it’s a cloud stock. Having the ETF as a, as a, an option, there is a good way to go because it gives you that exposure without opening yourself up to the risk of not knowing what you don’t know and picking the loser or losers in industry and not getting the type of gains that you should if you just bought the broader industry. So that would be an example, whether that’s cloud stocks, whether that’s airline stocks, or even if you do believe in, in various factors like growth investing or value investing, those are ways to get exposure to those as well.

Andrew (11:15):

But again, you do have to take it on a case by case basis. Maybe we should mention how we did this research to do it on their own time with their own ETFs that they’re looking at. For example, to look at the Vanguard ETF, I looked at all I did in the Google VG and then added the word holdings. And so it brought me up to the website, etf.com. And there were a lot of other good websites on there. And it tells you what stocks are in the ETF and what their weightings are. So, as an example, with the VVG, again, with this Vanguard growth, it’s a pretty big difference

Andrew (11:54):

Because they have Apple at 10% of the portfolio, at the same time, Visa is a 1.8, 6% Facebook, another big tech growth. SOC is only at 3.9, 7%. So, you know, less than half of what Apple’s at. So you have to know that if you’re buying into this particular growth ETF, you’re getting a lot of Apple, and you’re getting a lot of Microsoft, and those are big percentages. And that’s going to change based on what the ETF is that you’re looking at. So if you’re looking at like a cloudy ETF, or even like home builders, ETF, as an example, there could be particular stocks in there that are so heavily weighted that it’s going to move the index. It could move differently than how the sector performs in the stock market. So just another factor to keep in mind. And, you know, if you’re looking at specifically trying to get exposure and they have very specific way, that could be an advantage, but also a disadvantage of looking at an ETF.

Announcer (13:03):

What’s the best way to get started in the market—download Andrews ebook for free@stockmarketpdf.com.

Dave (13:11):

That’s a great observation. I’m glad you brought that up. And the etf.com is the same place that I was looking at, the ETF that I was kind of looking at as well. So it’s a great website, it’s free, and it’s a great place for you to go and get an idea of some of the things we were talking about. You can see all the different weightings. You can see all the different sectors that are involved in, in the weightings as well. We’re talking about growth, but it’s not just growth in this particular one for the I-Shares. They have a technology sector; they also have consumer cyclical, healthcare, industrials financials, and it just kind of goes on and on and on. So it has exposure to different things beyond just the top 10 companies that may be listed. You can see every single company that’s listed in the ETF if you so choose.

Dave (14:05):

But of course, as you go down the list, as you get to the cost of the bottom of the 532 in this particular one, it’s going to be a little impact on the actual performance of the ETF. But this brings me to, I guess, what I wanted to mention in regards to Gordon’s question and maybe a way to help him get around this. One of the course advantages to two ETFs is the ability to bundle many companies together to give you exposure to a particular sector or an area that you’re trying to fit into your portfolio. But the other part of that is that you don’t have any control over what’s actually in the ETF. You buy the ETF, somebody else makes those decisions, and you just put the money in, and away we go.

Dave (14:55):

So if Gordon feels like that, he’s missing out on something that if these ETS, for example, are missing a company or two or five, that he feels like are growth that he’s missing out of, he has the ability to, in essence, create his ETF with the advent of no BS for trading that removes that barrier, that used to be there of buying companies. And it costs you a lot to buy ten companies other than the company’s actual investment. There’s no other financial outlay. So there’s that advantage. The other advantage is that you can control your weightings; however, you feel they need to be. For example, suppose you think that Amazon has greater growth potential and want it to have a bigger impact on that portion of your portfolio. In that case, nothing is stopping you from having a greater weighting in that company.

Dave (15:53):

And when we’re talking about waiting, what that, what we mean is, is that it has a greater portion of the percentage of the respective portfolio. For example, let’s say you have ten companies, and each of them is a hundred percent. You could maybe slot Amazon in at 25% and then accordingly adjust the other ones down to make sure that Amazon has a bigger impact on the return of that particular thing you’re trying to create. And with the other advent of, with fidelity and Schwab, I know of, for sure that offer these slices, where you can buy portions of different companies. In other words, you don’t have to buy a whole share. Let’s say you don’t have $10,000 laying around to start to try to create something like this. You could do almost the same thing with the shares of the slices. You can take $500, and you could split it up into ten different companies by $5, depending on how you want to do it and how you want to weight it.

Dave (16:55):

And you can include the companies that you want in there. And then every single month, if you want to add to that, that portfolio, you just add to those slices, and you build it up that way. So there are, there are other ways to go about trying to accomplish the same thing. You can get ideas. So you don’t have to go about the stress of trying to create your ETF or worrying about, Oh my God, how am I going to decide which of these companies to pick if you like all these companies, but one or two, or there are two or three other ones that you want to add to this list? Nothing is stopping you from trying the idea that I’m suggesting. And I think it’s an easy way for him to create the ETF that he really wants and still get the growth he wants because he’s going to be controlling the weightings and the companies he puts in ETF. And I think it’s; It’s a good idea. What are your thoughts on that?

Andrew (17:53):

I think it’s a good idea too. And I think it goes down to, I guess, what’s your goal and what do you feel comfortable with? So if you feel like you can make a decent judgment call on which companies are here to stay for a long time. As an example, he mentioned in the question these stocks will be for my errors. He implied that he wants something that he’s just going to hold, which will be these long-term growth stocks. And he can forget about them and have them return a lot of compounding returns for his heirs and, and years and decades later. I think if, if you’re, if that’s the true goal, then maybe buying whatever stocks you believe that to be and holding them would be better than doing an ETF like this, because like we mentioned, this ETF is constantly filtering stocks in and out. Still, you know, on the same token, if you believe that strongly in the growth theme, then maybe that is what you want.

Andrew (19:03):

Maybe you do want almost like an active manager. Who’s constantly picking the highest growers and constantly dumping those that don’t consistently keep that high growth. Maybe that is what you want, or maybe you, you want something you kind of buy and never touch. So it depends on what you’re looking for, what you believe will lead to the most success, and understanding that these are the realities of ETFs. And these are your other options and making a decision based on that. So it leads into what I wanted to talk about as a segment on the podcast already makes for a good little segue if you will, we’ve, we’ve had several episodes where we’ve talked about some of the different secular growth trends that are happening right now can seem to happen in the future. And I thought it would be helpful to provide a little more clarity on it, or maybe more ideas on how you can incorporate it into your investing. So actually want to flip the table on Dave and asked Dave when you first started looking at these different secular trends. Maybe you found one or two that you found exciting; how did you start to incorporate that into your research, if at all? And what did that look like?

Dave (20:37):

Ooh, boy, that’s a good question. So yes, I did find, I found different. I’ve been finding different trends among the markets Of different things that have excited me and have gotten me interested in different things. And for, for a variety of different reasons. We’ve talked a lot about this in the past, and I’ve mentioned this several times that the financials are an area that I feel like I have a certain comfort level. And does it mean I’m perfect and make all the great choices? Not always, but I feel pretty comfortable looking at a bank or an insurance company or an investment company and having a pretty good idea of where I think the company is going and what’s going on with them and, and understanding the nature of the business and how they operate and, and where the income and growth are going to come from. And so, as somebody who tries to find value ordeals, I’m always kind of looking in, in areas that generally are going to lag the market behind it.

Dave (21:48):

A perfect example is behind the companies that we are just talking about some of the big growth names that everybody’s familiar with, the Apple, the Microsoft, the Facebooks of the world. So the companies that I look at are more along the lines of, you know, the, I don’t know, ally bank or Wells Fargo or Schwab, or, you know, Moody’s or any of those kinds of things that kind of play in a different area. But along the lines of discovering those, I also discovered the world of real estate; now, real estate was something that I always had kind of an interest in, but I always started looking deeper into REITs in particular and trying to figure out how they tick and what makes them work. And along the lines of learning more about that particular sector, I discovered that generally reach kind of leg the market return, I guess, and not necessarily returns. Still, when the market went down in March as it did so badly, generally, the REIT sector will kind of lag the return to air quote, normal compared to other sectors of the market.

Dave (23:00):

That’s something that kind of caught my eye because sometimes those will be more overlooked, and it allows you to find things that are more undervalued as the market has gotten more and more heated. And it has risen by weeps and bounds over the last six, eight months. It’s been harder and harder to find things undervalued or have kind of gone unnoticed and have a chance to buy at a good price. That’ll continue to grow into the future. And so those are things that I’ve tried to focus on is trying to find different areas that may necessarily not always be in my strength, I guess, a circle of competence, but are related enough that can allow me to try to analyze them another area that I’ve been trying to try to find different ideas is looking in things like utilities particularly electricity because I feel like with the growth of all the tech stocks, there’s going to be an underlying need for more energy.

Dave (24:06):

There’s going to be; we’re going to need more electricity to power, all that stuff. And so I’ve been trying to word more and more about that, that sector. And I just haven’t been able to find anything interesting so far, which doesn’t mean that there are no great companies. There are plenty of them, but just that fit my needs. It’s, it’s always a challenge. And so those are all the different kinds of things that I look at. And sometimes, for me, I try to look at that sector that may not have been performing well but have the potential to do well. Not only now, but into the future. And that’s really where I feel like the investing art comes into play is trying to capture not only what’s happening now, but also anticipating what you think will happen five, ten years down the road, because that’s really where the growth is going to come from.

Dave (24:57):

It’s not necessarily for the next six months. It’s more about what’s going to happen ten years from now because ideally, I would love to buy a company and hold onto her for a long period for several reasons. One that’s really how you can compound your growth over the long term. And number two, it’s a lot easier if you don’t have to go out search for another company, that’s just one less you have to search for. So it takes that one less, I guess, headache off of your shoulders if you will. So I guess that’s some of my initial thoughts. So Andrew, what are your thoughts?

Andrew (25:33):

Yeah, I have; I have several curious though. So it sounds like though there may be a secular trend, like the electrification, for example, of cities and that higher usage, that, that seems it seems to be moving towards that way. And it looks like in the next five to 10 years, that electricity demand will be higher, not lower keeping that as a backdrop and kind of looking at stocks in that industry while it’s, it’s favorable for you, you’re still not throwing caution to the wind or, or paying any price just because it’s in this secular growth trend that you’re looking for. Is that sound fair?

Dave (26:18):

Oh, that’s fair. Yeah, I know. I’m a lot of the same principles and ideas that I have with anything else that I’m looking for. In essence, I guess sticking to my guns and just because it’s an area I think is going, being of value at some point right now, I can’t find anything that fits, you know, checks all the boxes.

Dave (26:44):

You know, it doesn’t have the, it doesn’t, it just doesn’t have the right price that I’m looking for. And that’s really what it comes down to. There’s, there are lots of great companies out there that are doing well. And there are all different kinds of aspects of the electrification of different things. And there’s, you know, there’s lots of conversation without getting into the politics. There’s a lot of conversation about the move towards green, green energy, and all those kinds of things, which I think will happen. Is it going to happen overnight? Nope, it’s not. And a lot of that is because I’ve learned through just digging into things like I know Andrew has warned about different things, digging into it, you just discover different things. And there’s lots of talk about when some of these things are going to happen, but with the electrification of different things, the tech isn’t just as there yet, and the desire is there, but the tech isn’t there yet. And so until some of those things catch up, it’s just, it’s not going to happen. But it also, by doing the research, now it gives me a head start on being able to narrow down what I’m looking for, as opposed to just kind of looking at the whole broad range, if that makes sense,

Andrew (28:02):

It does make sense. And that was kind of what I was getting because I have a very similar mindset I want to be involved in. You know, like the question from earlier, you, you do feel like you want to have exposure to different things, but at the same time, you have to remember that a lot of the times, the price you pay for investment makes a much bigger difference than what investment you buy. And so that’s going to be true, whether you’re talking about a company or even a company in a trend. And so the timing of when you buy into that trend, because these trends if we’re going to talk about secular growth trends, these are things that happen over a very long time to Dave’s Point. How long ago was the electric, the first electric vehicle, and then two.

Andrew (28:50):

And how long has it taken from that point to here? And then how what percentage of cars on the road are, they are Electric? It’s not; it was not something where a switch was flipped, and every car moved over. So, So while these trends can be very exciting, that’s something I’m constantly looking at. Like when a big thing that I’m, I’m following and learning a lot yeah.

Andrew (29:18):

About. And it’s frustrating because many of these stocks are so expensive that you learn about them and get excited about it. You do a simple evaluation, and you say, wow, this thing is, there’s just no way you could justify its growth. Even if it grew like Google, you know, and it had 20% revenue growth for, for four years in a row, still couldn’t justify the evaluation like this. And so you have these, these, these constraints, but it’s because it’s what the rest of wall street is doing too. And they’re all looking at these trends as well. So you want to keep these in the back of your mind, but you don’t want to pay any price for them. And I think that’s what’s very, very important when it comes to thinking about what the secular trends are, what, what things are growing, and how that applies to your portfolio.

Andrew (30:10):

So I’ll give you one last, maybe partying example of why the price you pay is important. So I pulled up, I’ve done something like this in the past, too, with a blog post, but let’s, let’s kind of do a different version. So I pulled up the top 10 S and P 500 components for 1999; just as a recap, 1999 was right before the.com bubble burst. Not saying that we’re there for them, just saying this is a good illustration. You had Microsoft GE Cisco, Walmart, Exxon, Intel, Lucia, IBM Citigroup, and American online, which was AOL. Now you hear that name, those names, and some of those really good Microsoft. That sounds great. You know, I would love to buy Microsoft and in 99 or Cisco or Walmart, but it turns out, you know, at Walmart’s done gray, right? They’ve, they have the amount of stores they’ve been able to grow has just been extraordinary.

Andrew (31:10):

Cisco powered so many routers and, and they continue to do very well. They’ve done very well for me. I’ve I bought them back in 2015, I think, and they outperform the market with them. But if you were the, by each of these Microsoft, Cisco Walmart, and you were the boom at the peaks back in 1999, Microsoft is a special case because that one is, is gone pretty much through the roof, but even, being such a unicorn-like Microsoft is and growing 17% plus a year in share price over the last, let’s say five, ten years. If you were the buyer in 1999, when it was crazy expensive and you, the hold it to today, you’d have about 9% a year on your money on this Microsoft investment. But if you look at Cisco and Walmart and you bought at those peaks, you’d be looking at something like 3%, a year, 4% a year, really bad returns when you compare it to the rest of the S and P 500.

Andrew (32:09):

And some of these other names, I think, don’t even need to be mentioned like GE Exxon, you know, those, those fell from grace. Intel has been okay, but that one has not performed as it did leading up to 1999. And we know what happened to Citi group in 2009 and American online AOL. And nobody uses that anymore. So the point I’m trying to make is that these stocks in 1999 are the top 10 of the S and P 500. They were very, very expensive from a valuation standpoint. Still, Microsoft not only did it ride a growth trend through the personal computing revolution, that also is riding the cloud trend and Walmart row, the trend of, you know, but we could also go on and on with these companies, they were part of great economic and secular growth trends. But even Microsoft, I think that underperforms the overall S and P 500, and it comes down to that price paid when you invested.

Andrew (33:15):

So you always have to keep that in mind. You always have to remember it. Yes. Research it. Yes. Try to find good companies in there. I’ve been finding them, you know, they might not always be the sec, the same secular growth trend. You want to be a part of that, but you can find different ones and find them at decent deals, but you have to flip many rocks. You have to be patient, and you have to make sure you’re going to pick at your price and not play at the price that wall street is giving you. So I think when it comes to incorporating secular growth trends in your research, those are some things I would keep in mind when I’m looking at incorporating it and finding those types of stocks to give my portfolio that kind of exposure.

Dave (34:01):

That was awesome.

Dave (34:02):

All right, folks. Well, that is going to wrap up our conversation for this evening. I wanted to thank Gordon for taking the time to write us his great question, and we hope we answered your question to your satisfaction. And without any further ado, I’m going to go ahead and sign this off. You guys go out there and invest with a margin of safety emphasis on the safety. Have a great week, and we’ll talk to you all next week.

Announcer (34:22):

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