Getting Started With QQQ As Your Core Index ETF
Summary
- Getting started as an investor is a lot easier than new investors think it is. Start by finding a discount brokerage and opening the right type of account for you.
- Next, realize that the “new economy” focused around technology and consumer trends is growing faster than the “old economy” which is capital intensive and lower margin.
- Then, find a low cost, diversified Exchange Traded Fund that is “new economy” focused to make your first small investment into, there is one in particular you should use.
- After making your first small investment, buy more of that fund regularly, called Dollar Cost Averaging, to build your account up over time.
- Hold onto that fund for a long time and learn about the stocks that are held within the fund.
New investors tell me, whether Millennials or my Gen Xers, that they don’t really know how to start investing on their own. Their experience is often just the employer sponsored retirement plan they have at work or no experience at all. Today, I’ll walk through the easiest way to invest that I think all new investors should start with.
[If you already know how to open an account and the basic differences between mutual funds and ETFs, you can skip down to the “The One ETF To Build a Core Portfolio With” section.]
Open An Account
The first step to beginning to invest on your own is to pick a discount brokerage to work with. The simple reason to use a discount brokerage for a beginning investor is that it is the cheapest way to go. Unless you are investing $100,000 or more (like from a 401k rollover), there is little reason to hire an advisor and pay fees that can really hinder your account performance on a small asset base.
If you really want to talk to somebody about financial planning because of your stage in life or life changes (getting married, having children, career changes, starting a business, etc…) or long-term investment strategy, then find somebody who will work for an hourly retainer. Actual investment advisors or money managers (like me) who charge a percentage against assets under management, should be reserved for six and seven figure accounts that are starting to branch into or already own stocks and options.
There are many decent discount brokerages to choose from. In general you want to work with one that has low trade costs (most do), no-commission ETF lists and a very solid balance sheet (most do).
there are several discount brokerages listed on the front page of Seeking Alpha underneath the “trending articles.” They are all respected firms and I have accounts at two of them. You really can’t go wrong with any. Take a look at the costs and specials for opening an account to decide.
When you contact them, either online or by telephone, you will need to know what kind of account to open up. They will be happy to help you figure it out. There are several types of accounts that are popular:
- Individual Account – this is a taxable account that has no restraints on when you take the money out.
- Joint Account – similar to the individual account, but generally for couples.
- Roth IRA – IRA stands for Individual Retirement Arrangement (although most people say account). The Roth IRA is a tax-free account that generally can’t be withdrawn from until age 59 1/2. It’s attraction is the tax-free feature that allows all gains to eventually be withdrawn income tax-free.
- Traditional IRA – this account receives a tax-break on the front end, that is dollars contributed in the current year are deducted from your earned income, thus reducing your current tax burden. Few people open these types of accounts as they are redundant to retirement plans at work in many cases.
- SEP IRAs or SIMPLE Plans – these are plans designed for the self-employed and small business owners. They are similar to 401k plans in many respects, but less onerous. If you are self-employed or own a small business, you should consult an accountant and a financial advisor in my opinion to make sure you set up the right type of plan.
Focus on the New Economy
Over the past couple decades, the global economy has been going through a transformation. Highly capital intensive businesses have been facing profit margin pressures as technology fundamentally changes the way how business operates. At the same time, consumers have been changing the way that they consume goods and services.
We can see the changes in how many jobs have been replaced by robots, how we shop online, the percentage of time we eat out compared to our grandparents and how the financial system itself operates. Technology is everywhere from the internet to communications to entertainment to biotechnology to consumer products and everything in between and around.
As you start investing, you want to make sure to invest in these gigantic trends that won’t disappear anytime soon. To be sure, the trends will undergo constant internal gyrations, surges and leadership changes, but the big trend toward technological innovation and evolution is really forever.
Look back two hundred years. Think about how we got around. By horse. Trains came along and for decades that’s how we moved long distances. And then suddenly the internal combustion engine and cars. Now we are on the verge of electric vehicles and hyper loops.
If you are old enough to remember telephones with cords, think about how the telephone evolved. From dials to push buttons. From cords to wireless to cell phones. Remember, we used to have to answer the phone to know who was calling. Eventually there was CallerID, then Caller ID that was programmable so that the number attached to a name, and now, well, just look at the screen.
Change is eternal. Embrace it. Don’t look to the factory, look to what will make the factory better. Don’t just think about health care, think about what will lower health care costs and provide better outcomes. Don’t buy into things that are constantly trading within a range due to massive competition, find the niches that offer competitive advantage and pricing power.
What Type of Fund To Begin With
There are thousands of stocks and different investment funds. The most common funds of the past are called mutual funds. The newer type of fund is called an exchange traded fund or ETF. There are other types, but they aren’t for beginners so I’ll skip them. All funds hold stocks, bonds or other assets within their structure. Think of a fund as a basket of stocks, bonds or other assets.
A mutual fund is an “open ended” investment product that you can redeem any day, but only at the end of the day. Likewise, you can only buy into it at the end of the day. This is a slight disadvantage to a beginning investor if you are going to try to set price levels for purchases. It’s more of a disadvantage to investors who trade more.
The more significant disadvantage for mutual funds is that performance has lagged for decades for a number of reasons. Various combinations of fees, poor construction, poor management and cumbersome rules have hindered what is in theory a great idea.
ETFs conquer many of the problems that mutual funds face. ETFs are low cost in general, which is a very good reason to use them. Next, they can be traded throughout the day, making your acquisition strategy a bit more flexible. Finally, the baskets of stocks within the ETFs are created by a formula that is predictable and understandable. For taxable accounts, an ETF is also usually very simple for tax reporting.
An ETF is where you should start investing. The simpler the ETF, generally, the better it has performed. While you will hear terms like “smart beta” and “managed ETFs”, in general you can ignore all of those when getting started. Down the road, there are a few you can add once you have built a core portfolio approaching six figures. But generally, even when investing tactically and trading more, simple usually wins.
The One ETF To Build a Core Portfolio With
The core ETF I believe you should own is called the PowerShares QQQ (QQQ). It tracks the Nasdaq 100 stock index. That index is composed of the 100 largest companies on the Nasdaq stock exchange. The stocks are held in order of market cap (market cap weighted). The top five holdings are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB) and Alphabet – formerly Google – (GOOG) and these make up about 40% of the fund. Other top holdings, in order of percentage of the fund, include Comcast (CMCSA), Intel (INTC), Cisco (CSCO), Amgen (AMGN), Kraft Heinz (KHC), Broadcom (AVGO), Priceline (PCLN), Celgene (CELG), Charter (CHTR), Starbucks (SBUX), NVIDIA (NVDA), Walgreens (WBA), Qualcomm (QCOM), Texas Instruments (TXN) and Gilead (GILD).
What you can see from the top 20 holdings, is that the fund is very “new economy” focused. These companies are among the leaders of today and largely tomorrow. Yes, there are other great companies out there to find, particularly smaller fast growing companies, but you are looking to build a core portfolio without extending too far on risk and still keeping good growth potential. The PowerShares QQQ does that.
The PowerShares QQQ is what I call “lightly diversified.” It is composed of nearly 60% technology stocks, but from many different subsectors that serve various parts of the broader economy. It also includes about 20% consumer discretionary stocks, 11% health care stocks and 5% consumer staples.
How good is the performance history for QQQ versus other funds? It is outstanding over virtually all time frames. Consider this. We know that the S&P 500, which is represented by several ETFs including the popular SPDR S&P 500 (SPY), has done better than most stock mutual funds over various time frames. Here’s how QQQ has done compared to SPY over 3 years, 5 years and 10 years:
