Why write this article?
- A reader friend left a message the day before yesterday and wanted to know “If you are busy at work, have children and families to take care of, or you can’t squeeze time or energy to research investment, whether investing in the market or Nasdaq ETF is the more recommended method?”
- I also found that in my blog, readers keyword searching ranking list, the term ETF has always been in the top of few places.
- In the later October, when I shared my new book “The Rules of Super Growth Stocks Investing”, many readers also wanted to know my views on ETFs. Hope I can talk more about ETFs.
- I really don’t understand why some people want to buy stock funds.
Why investors should invest ETF tracking broad market?
In my book of “The Rules of Super Growth Stocks Investing” section 1-5, “3 criteria to screen out trusted and successful investors”, I proposed if the investor’s 10 years of average annualized rate of return (IRR) is lower than 10%. These investors is advised to invest in ETFs that track the broad market.
Stock return can’t even match treasury bonds
According to the statistics of the book “Just Keep Buying” : Between 1926 and 2016, only 4% of individual stocks performed better than US treasury bonds, unless you are sure to find out that 4% of companies. Bonds are a safe, but extremely low-return, investment method that can preserve capital. The risk of stock investment is very high. If the investment return is not even comparable to that of treasury bonds, then there is no need to take risks at all.
In addition to the handling fee ratio of ETFs is much lower than that of ordinary stock funds, the trading handling fee of ETFs in Taiwan is much lower than that of ordinary stocks (about 1/3). If it is an online brokerage company in the United States, almost all are zero dollars.
That is, the annual holding cost: After the purchase, the ETF industry will also charge investors a custody fee every year. Investors should not underestimate the handling fee and custody fee, which will be very considerable in the long run.
Most people need to go to work, take care of their families, go to classes, have limited time available, and do not have the time and effort to invest in research. Especially for the investment method of active stock selection, the prerequisite is that you must be willing or able to invest a lot of time for fundamental research.
Better performance than professional investors
ETFs that track the broad market perform better than professional investors: Bank of America (ticker: BAC)’s long-term research points out that only 25% of fund managers have better investment performance than the broad market.
Most people can’t afford stock fluctuations
When stock prices rise to make money, no one cares about stock price fluctuations. However, as long as the stock price drops, most investors will immediately panic out (the stock market has a characteristic, rise slowly but fall swiftly), and as a result, it is difficult to make a profit. ETF tracking broad market has lower volatility than specific stock price.
Most people underestimate ETF
ETF investment doesn’t need to follow the stock market, don’t need to care about the trend of the era, don’t need to research the industry trend, it is a kind of no-brainer investment method, which everyone knows. But I want to emphasize again that many people think that ETFs have not risen much and cannot make money is totally wrong. People with this kind of thinking has lower possiblity to get rich from stock market. Unless you have the ability to choose the right stocks for a long time and continue to beat the market, you will never make money by investing in the stock market. Why?
History has proved that only a small number of investors are suitable for active stock picking, and even fewer of these active stock pickers can continue to beat the market. To be more precise, only a very few, very rare people can beat the market every year, so the probability is such lower you can imagine. Therefore, people who are obsessed with proactively choosing stocks to get rich, impatient to gradually become rich, or delusional to find a 100% or 50% annual increase, and disdain for ETFs, will not be able to make money in the stock market.
Just like in the section 1-1 of my book “The Rules of Super Growth Stocks Investing Rules”, the table lists the annualized rate of return (IRR) of the U.S. S&P 500, which represents the U.S. stock market in the past 25 years, is 7.71% (excluding dividends); Please refer to my other article “Investors should pay attention to the annualized rate of return (IRR), How to calculate?“. Don’t underestimate this number.
According to the rule of 72, 72 divided by 7.71 is 9.34, which means that your investment assets can be doubled in 9.34 years; if dividends are included, the performance will be 9.47%. And 7.71% of the annualized return on investment will not be a problem to defeat inflation, unless you are unlucky to encounter the rare century inflation in the 1970s, but this situation is rare, the only situation in the entire century, and the possibility are not always there. For details, please see my other article “Tax, inflation and rate are the top three serious killers to investors“.
Note: You can use the “Querier to Annualized rate of return for S&P 500 Index” to instantly query the S&P 500 return for any year, or the S&P 500 annualized return for any two years.
What kind of ETF should I buy?
I remember that in my new book launch event, some readers once asked me my views on investing in ETFs. I personally think that if investors choose to invest in ETFs, they should only choose ETFs tracking the broader stock market; do not invest in ETFs in a particular field, industry, or geographic region. The reason I hold is very simple; investing in ETFs not tracking the broader stock market will lose the benefits and advantages of investing in ETFs.
This approach is actually the same as investing in individual stocks. In addition, the constituent stocks of non-market ETFs are uneven, you must be forced to buy some poor constituent stocks that wealth management companies forcibly added for various reasons (saying it will scare you).
ETF can stand the test of the times
Everyone has forgotten a very important thing. Long-term investigations by several well-known financial institutions:
- Consistent long-term research by many institutions, including Bank of America (ticker: BAC), indicates that only 25% of equity fund managers outperform the broader market.
- According to the statistics of Morningstar Direct under Morningstar (ticker: MORN) in 2021, the performance of active US stock funds lagged the market by more than 85%.
- The latest report from S&P Dow Jones Indices (ticker: SPGI) shows that more than 79% of active mutual fund managers will perform worse than the S&P 500 and Dow in 2021.
- The S&P Indices Versus Active (SPIVA) scorecard, which tracks the performance of active funds, with year 2023’s data showing that 79% of fund managers will underperform U.S. stocks in 2022, up from 42% a decade ago.
In 2020, the US statistic said assets under equity fund managed totaled 17.6 trillion U.S. dollars, but the trend is gradually decreasing. ETFs that track the broad market are generally accepted by investors.
In 2020, the scale of Taiwan’s ETF will exceed NT$ 1.7 trillion. Yuanta 0050 ETF, which tracks the Taiwan stock market, has 190,000 beneficiaries, and Yuanta High dividend ETF 0056 has 350,000 beneficiaries. In 2020, the total assets of ETFs in the United States are 5.2 trillion U.S. dollars, and the trend is increasing. In 2020, the total assets of global ETFs will rise to the highest level in history of 8 trillion U.S. dollars.
Some small reminders
Holding fee take priority
Since the target ETF tracking is the same, the handling fee should be prioritized. The issuer of the ETF is not important at all. Don’t be superstitious about fame, because it is not important at all. To be honest, the difference between tracking the same underlying ETF is only in handling fees. And because long-term investment can get rich, investors usually hold it for a not short period of time, which will be the main cost of investors.
Buy only ETFs troacking local targets
For example, Taiwanese issuers, Hong Kong issuers, and US local issuers will issue ETFs that track the S&P 500. For any reason, if you want to invest in an ETF that tracks the S&P 500, please choose an ETF issued by a local U.S. issuer. In the same way, don’t invest in ETFs tracking Hong Kong’s Hang Seng Index by Taiwanese issuers. It is of course better to buy ETFs that track Hong Kong’s Hang Seng Index issued by Hong Kong players.
The reason is that in addition to the relatively low holding fee, the local issuers will be more efficient in tracking the investment target, and the response will be more sensitive and faster. For example, in tracking the most famous Yuanta Taiwan 0050 ETF, which represents the Taiwan stock market, TSMC (ticker: TSM) accounted for more than 40%, but TSMC accounted for about 30% of the actual market weight of Taiwan stock market. If you buy ETFs that track the Taiwan stock market abroad, the ratio may be even more out of balance. And don’t forget, foreign investment, there are various difficult issues such as exchange rate and income tax.
Hold for long haul
As with the principle of investing in individual stocks, we cannot guarantee that the stock market will have good returns every year, but in the long run, the stock market is stable and upward; investors should pay attention to the IRR, which is the average annualized rate of return. When the stock market crashes, it is especially the best time to buy ETFs that track the broad market, because the stock market will eventually rebound. Unless you only want to make short-term investments, not only are you not suitable for investing in ETFs, you should stay away from the stock market and use other methods for your financial management.
Taiwan’s ETF holding cost, even if it invests in ETFs that track the local underlying, compared to the United States, the total holding cost is still quite high.
The views of the masters
Buffett said in his 2013 Berkshire shareholder letter “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” And Buffett repeated this view at almost every year’s shareholder meeting. With his decades of rich investment experience, the famous book author of “Winning the Loser’s Game” Charles D. Ellis came to a conclusion “Most investors are not beating the market; the market is beating them.”
Buffett mentioned in his 1996 shareholder letter: “Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
Invest in U.S. ETFs as much as possible
Unless you don’t care about investment performance or have other special reasons, to be fair, from the perspective of investors, investing in ETFs issued in the United States is better than investing in ETFs issued in Taiwan. The reasons are as follows:
- Insufficient diversity of tracking targets for ETFs issued locally in Taiwan: For the Yuanta 0050 ETF, which is the most popular in Taiwan and represents the Taiwan stock market, only 50 stocks are tracked. The most famous in the United States, SPY, IVV or VOO tracking that represents the S&P 500 of the US stock market, covering 500 stocks.
- The holding cost of ETFs issued locally in Taiwan: Even if they all invest in ETFs that track local targets, the total cost of holding ETFs in Taiwan is still quite high compared to ETFs in the United States. Yuanta 0050’s expense ratio is 0.42%; while the US SPY expense ratio is 0.094%, VOO and IVV are as low as 0.02%.
- Transaction cost: The transaction fee of approximately 0.14% is required for each buy and sell transaction of ETF issued locally in Taiwan. And if you use an online brokerage company in the United States, not only the trading fees for stock transactions are zero transaction fees, but ETFs have already zero transaction fees a step earlier.
A better approach for ETFs is to use US online brokers to buy US-listed ETFs that track major market indexes. The lower the holding cost, the better, and there is no need to be superstitious about the issuer. SPY is not a good target, it is recommended to choose IVV or VOO. Using sub-brokerage to buy ETFs issued in the United States, or to buy ETFs issued by Taiwanese companies that track the S&P 500 index, is an “extremely unwise” investment behavior.
In the past 25 years, the IRR of ETFs tracking S&P 500 is only around 7.5%. If you use sub-brokerage or buy non-US ETFs that track the S&P 500, transaction fee and handling cost combined (this is the mathematics of the first grade of elementary school, I won’t calculate it for you all), it will cost you around 1.5% of unnecessary costs. Then you only have about 6% of the reward left. You waste 20% of capital, it’s a big number! If you hold it for many years and include long-term compound interest, it will be much more than 20%!
Finally, I would like to quote Seth Klarman’s famous quote ends with “If you can’t beat the market, make yourself the market.”
- “Most investors should invest ETFs tracking broad market“
- “Market index and the market index ETF is not identical“
- “Querier to Annualized rate of return for S&P 500 Index”
- “S&P 500 index, the only stock worth holding forever“
- “A table comparing S&P 500, Nasdaq, Dow Jones, Philadelphia Semiconductor Index over the years since its inception and annualized returns“
- “Investors should care annualized rate of return (IRR), How to calculate?“
- “US issued ETFs tracking US market is your best bet“
- “Top 10 ETFs and important major US stock market index“
- “Disadvantages of ETF investment“
- “Strong reasons not to invest in non-broad market ETFs“
- “Any strong reason to buy mutual fund?“
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