Welcome back to The Winning Investor’s Quick and Dirty Tips for Beating the Market! I'm your host Andrew Horowitz.
In our last episode, we discussed the "ABCs of ETFs" and compared basic information on exchange-traded funds vs standard mutual funds. We learned how ETFs can be a welcome addition to any winning investor's portfolio. If you missed that episode, you may want to go back and listen to it.
The Three Most Popular ETFs to Invest In
With that foundation behind us, let's take a look at three of the most popular ETFs that you can trade or invest in as part of a diversified portfolio. If you recall from the last episode, ETFs provide automatic diversification at a fraction of the price of most mutual funds.
The DIA and the Dow
So, let's start with the symbol DIA or the ETF better known as the "Diamonds." The DIA is an ETF that gives investment exposure to the Dow Jones Industrial stocks -- 30 in all.
The Dow Jones Industrial Average Index is comprised of 30 "blue chip" stocks of companies that have been around for decades. You'll recognize most of the components I'm sure -- companies like Wal-Mart, Exxon-Mobil, Home Depot and Microsoft. Anyway, before the days of ETFs, if you wanted to mirror the performance of the Dow Jones Index, you would have to buy the 30 stocks or components of the Index in the right balance -- that's a difficult task which would result in 30 separate commissions! That's no fun!
Now, through the DIA ETF, you can buy one investment which behaves just like an individual stock which -- in essence -- is just like buying each of the 30 stocks in the Dow! The ETF managers balance their holdings to mirror the Dow Jones Index as closely as possible. Most of the time, the DIA or "Diamonds" is one one-hundretdh of the actual Index, so for example, if the Dow Jones Index is at 10,000, the DIA would cost you $100 to purchase one share of exposure. This one share would be just like owning one share in all 30 Dow Jones Stock Components - the quick and dirty way to buy the 'Dow'.
That is what we're trying to accomplish by purchasing any exchange-traded fund. Instead of paying additional expenses to a mutual fund to pick a handful of stocks to try to outperform a benchmark index, such as the S&P 500, DJIA or the Russell 200 small cap index, which might not happen, we seek to mirror the Dow Jones and return almost exactly what it returns.
The SPY and S&P 500 Index
There are two other major US stock market ETFs I want to mention to you. The largest and perhaps most well known ETF might be the SPY -- which has a cool sounding, sleuth-like name. The SPY, often nicknamed the "Spiders," tracks the S&P 500 Index, which is a carefully selected basket of 500 stocks that are designed to be representative of the entire US stock market across all sectors and industries. Though most people look at the Dow Jones Index, which is only 30 stocks, others prefer to get a better feel of the US stock market by looking at the S&P 500. The SPY ETF allows you a way to get as close as possible to making a direct investment in the broad-based US stock market.
The SPY Fund is one-tenth of what the S&P 500 Index is quoting at a given moment. For example, if the S&P 500 is at 1,000, then the SPY ETF will cost you approximately $100 to invest one share. That gives you virtually instant exposure to 500 stocks, and it's as if you just bought all 500 stocks in the S&P 500 at one time in one transaction with one commission since you are buying them all in an ETF wrapper! That's a bargain! You would have to buy 500 stocks in perfect proportion to match the power and effectiveness of the SPY. Until the SPY came along, that was almost impossible for retail investors.
The QQQQ’s and the NASDAQ
Perhaps the third most popular ETF most people know of is the QQQQ's or "Quad Q's." Remember since the ETF fund in this instance invests in all of the stocks in the NASDAQ 100 your investment in the ETF tracks that index. Again, This particular ETF tracks the NASDAQ 100 Index, which is comprised mostly of technology companies like Microsoft, Apple, Google, Intel, and Dell. Here's a tip: generally if a stock has four letters in its symbol, like AAPL for Apple or GOOG for Google, it trades on the NASDAQ stock exchange. Just like the SPY and DIA - or "Spiders and Diamonds" - the Quad-Q's allow you to invest in the broader NASDAQ 100 Index with one purchase.
The Quad-Q's are about one fiftieth of the NASDAQ, or stated in easier to understand language, the NASDAQ 100 Index is about 50 times the QQQQs. So, if the NASDAQ is quoted at 2,000, then you can purchase one share of the QQQQs for about $50.00 to get broad-based exposure to the NASDAQ 100. This often makes it the cheapest of the three major market ETFs, which gives it a certain appeal. Sometimes the SPY or DIA when they're over $100 per share can be too expensive for many investors.
Where to Find More Information
These are the three most popular ETFs and you can always find plenty more information on them at Yahoo Finance, Bloomberg, Google Finance, MSN Money, or any major website that details free information on stocks and exchange-traded funds. Just type in their symbols - DIA for the Dow Jones "Diamonds," SPY for the S&P 500 "Spiders," and QQQQ for the NASDAQ "Quad-Q's". Remember, you can purchase ETFs just like you would purchase a stock using your online brokerage account or through your broker or money manager.
In the next episode, I'll share even more types of ETFs you can use to target specific exposure to add some additional layers to your portfolio!
Keep with us as we discuss even more ways to become a winning investor in our next podcast! If there’s a question you’d really like to ask, just email me at winninginvestor@quickanddirtytips.com or call 206-338-0836. That’s 206-338-0836 and maybe your question will appear on the show.
And if you like the show, tell a friend or leave a review on iTunes. Until next time, this is Andrew Horowitz with The Winning Investor’s Quick and Dirty Tips for Beating the Market wishing you all the best on your quest to investment success.
