ETF Denny (or anyone), Question?

I’ve directed the question to Denny, but anyone feel free to pitch in.

In a recent post you said you no longer invest directly in tech and prefer to buy an ETF that covers a segment of the tech industry.

I’ve never invested in an ETF and while curious, they just seem like a weird beast to try and evaluate - in other words, other than past performance (insert safe harbor here) I’ve not a clue as to how to even look at these critters.

Briefly, what do you look for when contemplating a purchase? How does the creator of an ETF make money? Anything else worthwhile setting forth with regard to valuation is welcome.

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Ignoring the triple leveraged bull and bear ETFs which are speculation pure and simple, ETFs are index funds that trade like shares, the name says it: “Exchange Traded Funds.” Their price (or value) tracks the net asset value (NAV) of the stocks in the index by which I think they really mean the price of the stocks, not the stock’s NAV.

other than past performance (insert safe harbor here)

I wish I could invest based on future performance! All we ever have, or had, or will have – until we invent and perfect time travel – is PAST PERFORMANCE. Why then do they always insert that stupid safe harbor? It’s just a protection against ambulance chasing lawyers who will sue based on the flimsiest of excuses like saying that you had a good year and some dumbarse taking that to mean that it was a guarantee of a good coming year. Why that insurance against lawyers has taken on the mantle of divine inspiration is beyond me.

The only guide we have is the past because we can’t see the future. Track economic forecasts if you don’t believe me.

Instead of tracking companies you have to track the industry or the sector the ETF is invested in. The only way I know of doing this is by tracking the long term performance of the index vs. market indexes or against a target growth rate (CAGR). To pick the two technology ETFs I started with 40 or 50 ETFs and began a process of elimination. Get rid of:

  • Not enough history
  • Not enough volume (liquidity)
  • Too low a NAV

That should get rid of more than half

My next step is to compare growth rates (the longer the better) and to discard the low growth ETFs.

Now it gets more personal. There might be competing ETFs, say two or there in semiconductors. Check the management fee, the number of stocks in the ETF, and so on. Make sure to visit the ETF’s webpage, not Yahoo, but the issuer.

My final two technology picks were an S&P semiconductor ETF. Semiconductors are going to be the hardware of high tech for decades to come

The SPDR® S&P® Semiconductor ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® Semiconductor Select IndustryTM Index.


and a small cap information technology ETF which combines “small cap” with “IT.”

The PowerShares S&P SmallCap Information Technology Portfolio (Fund) is based on the S&P SmallCap 600® Capped Information Technology Index (Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to measure the overall performance of common stocks of US information technology companies. These companies are principally engaged in the business of providing information technology-related products and services, including computer hardware and software, Internet, electronics and semiconductors and communication technologies.


My last piece of advice is to buy a position over a length of time, maybe a year, by dollar cost averaging unless you find an incredible bottom like 2009.

(insert safe harbor here) LOL

Denny Schlesinger


thanks for sharing your views on investing in an ETF. I am getting more and more interested in getting into them. It seems like its getting harder to pick individual winners, especially when you consider how much time and work it is taking to make that extra 1% to 3% extra gain (if at all).

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Thanks, Denny, that helps a lot . . . I’m really just getting comfortable with financial analysis for a company (with some wrinkles, like same-store-sales in retail and so forth). Seems like investing in ETFs requires a comfort level with a lot less specific knowledge.

I think I’ll sit on the sidelines for a while. I need to study this more before I throw any $$ at it.

I really like the prospects of FB, AMZN and GOOG/GOOGL but do not like the gyrations of individual stocks. So I put some money to work in FDN which is an ETF that has 10% on each of those three names.

FDN is the ticker for First Trust Dow Jones Internet ETF.

You get to ride higher with those internet giants and the ride is a lot less bumpy then trying to pick individual names.

FDN had a lousy year in 2016, up only 6%. It is due for a pop.

FDN also has 5% stake in NFLX so you get the whole FANG.


Beware that some ETF track mini sectors composed of a few very illiquid stocks. So they pad the fund with large companies that in fact wouldn’t be much impacted by profits from what is to them a minor venture

My favorite use of ETF is for diversity. Or near the end of a bear market when you expect almost every stock to go up soon. Though in the latter case I prefer closed end funds selling at a big discount. Easy money , the discount almost always narrows…

I will quickly add to this (in deference to not cluttering up Saul’s board) only because it is so important. The very first thing to note is that you must only buy an ETF when it is cheap. It is a superb way to average down into a bombed-out sector or any other index. Patience will then bring its reward. However, on no account buy, or even dollar-cost-average into an expensive index. The S&P500 is a good example.

With your TF, know exactly what you own.

  1. Gather all the tickers for ETFs for the sector or country or region or whatever from Google. Compare their charts together and isolate the best. Take a lot of time over this: ETFs are a long-term investment (or should be).

At MS check the following (make a comparison on paper with columns):

  1. AUM. Very low AUM can mean closure if it is considered unviable. The bigger the better.

  2. Total expense ratios.

  3. Total no. of holdings.

  4. List top holdings.

  5. Equal weight or cap-weighted?

  6. Yield?

  7. Any write-ups?