For the longest time, I have not been a fan of ETF (Exchange Traded Fund). Ever since the days when I was investing in the Singapore stock market, I have never liked to buy into STI index ETF because it was too boring and moving too slow. As of this time of writing, the STI is still trading at a price lower than it was 5 years ago!
However, unlike the STI ETF, the US ETFs have given great returns over the past few decades. Take for instance, the SPY rose by nearly 800% over the last 30 years.
The QQQ ETF rose by more than 460% over the last 23 years.
So, What Is An ETF?
An (Exchange Traded Funds) ETF is a basket of securities, shares of which are sold on an exchange. They combine features and potential benefits similar to those of stocks, mutual funds, or bonds. Like individual stocks, ETF shares are traded throughout the day at prices that change based on supply and demand.
The Good & Bad Of ETF Investing
Investing in an ETF can also minimise the risk of a particular stock being overhyped or not performing to expectation. However, the downside is that the returns could be lower as the gains of some stocks could be canceled out by the losses of some stocks.
What Is QQQ ETF And What Are The Biggest Companies In The QQQ ETF?
The Invesco QQQ ETF is an ETF that tracks the Nasdaq 100 Index. Because it passively follows the index, the QQQ share price goes up and down along with the tech-heavy Nasdaq 100. The biggest sectors and companies in the QQQ are listed below.
It is worth noting that the ETF may self-cleanse over time, thus, the above holdings may not be final holding forever. The ETF portfolio manager will get rid of the poor-performing stocks or stocks that do not meet expectations and add new stocks to ensure that the fund’s holdings remain in line with its investment objective and strategy. The QQQ ETF is rebalanced quarterly and reconstituted (addition & removal of stocks) annually.
What About SPY ETF?
The SPDR S&P 500 ETF trust is an ETF which trades on the NYSE Arca under the symbol SPY. SPDR is an acronym for the Standard & Poor’s (S&P) Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. In layman’s term, it is a basket of stocks which comprises the 500 largest companies in US.
This fund is the largest and oldest ETF in the world. The S&P 500 serves as one of the main benchmarks of the U.S. equity market and indicates the financial health and stability of the economy.
The Top 10 sectors and holdings of SPY are as follow:
So Why Invest In These 2 ETFs? And Why Now? And Why DCA Automatically?
In the 2nd part of this article, I want to share why I am investing in these 2 ETFs, why now and not wait till a major crash and lastly, why do Dollar Cost Averaging (DCA)?
Why SPY & QQQ?
I chose to invest in these two ETFs because these 2 “stocks” are one of safest investments out there, with proven record (over a prolonged period of time) that they will eventually go back to all-time-high and then create a new record high. This has happened even after multiple market crashes, black swan events, pandemic, wars..etc.
While the growth rate may not be as explosive as popular stocks such as Tesla in a shorter term, it is also less volatile and almost zero chance of going bankrupt, as it keeps self-cleanse to kick out poor performers and add in potentially better performers.
It may not grow as fast as expected but it may not crash as fast as the more speculative and volatile stock. If you have bought Tesla at its all time high of USD407 in Nov 2021, you would be devastated when it dropped to almost 1/4 of that price just over a year later.
It is also unlike a single company which faces competition or the risk of growing redundant over time. Some companies or industries can dominate for many years but eventually lose out to other emerging companies or industries. Just take a look at the most valuable companies in the history of the US stock market. It is the same few companies dominating over the past 100 years.
ETFs are really good for newbie / beginner investors who prefer a less risky portfolio and has the holding power to stay invested for the longer term (3 to 5 years).
Upside Potential
Let’s just assume that when the market eventually recovers and the next bull run starts, both index will eventually return back to their all-time-high share price.
For SPY, there is still any upside potential of around 20%, when it reaches back to the previous all-time-high price.
As for QQQ, the upside potential is higher at more than 30% as it has crashed harder last year (2022).
Of course, it would be naive to think we can achieve such returns in the short term (1 ~ 2 years), as there may be more crashes ahead, but give it more time, it will give fabulous return after having dropped considerably from its all-time-high price.
Why Now?
Other than the upside potential listed above, I think it is a good opportunity to buy in small amount to create that snowball investment in ETFs over the long run. After the bear market of 2022, the market has more or less absorbed much of the shock of a rising interest rate environment and geo-political instability. Some in the bear camp are predicting a bigger crash ahead, but I think it does not matter if we do Dollar Cost Averaging (DCA), as it evens out over the long run.
I choose to do DCA with a small amount low to minimise the risk of a greater crash, because if it does happen, I am buying in small amount. I plan to allocate USD100 to QQQ and USD50 to SPY every week for my long term investments. If there is a bigger crash coming in the later part of the year, then I get to buy at lower price and not expend off my capital too soon. If this is already the start of the new bull market, then buying now means I am capturing the low prices before the share price eventually goes back to its all-time-high price.
No one can really predict what is going to happen in 2023, it may have the biggest crash in history or the bull market may start silently, or it may stay up and down and sideways for the whole year. DCA basically evens out the ups and the downs and the best part we don’t have to be right about either direction or be too optimistic or pessimistic.
Why DCA Automatically?
I chose to DCA automatically not just because I want to save time and effort to place the bids or to avoid forgetting to buy, it is also to make sure I stick through to my plan consistently over the weeks and months, regardless of how the market performs.
I mentioned about this at the start of the year that I intend to DCA into SPY over the whole of 2023 and eventually hit 100 shares to sell Covered CALL but I chickened out when I saw that the market was crashing, so I sold my SPY shares at a loss to preserve my capital. This time round, I intend to use the automatic recurring investment function inside Interactive Brokers (IBKR) platform to help me out so that I do not get distracted and abandon the plan again.
The Step by step guide to automatic recurring investment in IBKR
To do that, you must first have an account on Interactive Brokers, that allows you to buy fractional shares. I am not sure if other platforms have this function but I only try it out on IBKR.
You can read about why I chose IBKR as my brokerage (Disclaimer: not sponsored by them):
Which Platform Do I Use For Options Trading?
There are 3 interfaces (Web aka Client Portal, Mobile App and Desktop App aka Trader Work Station) in IBKR.
To use this function of recurring investments, you will need to use the Client Portal and log in through your web browser.
Step 1: Go to “Trade” and choose “Recurring Investments”
Step 2: Choose “Create Recurring Investment”
Step 3: Search for your ticker symbol, e.g. QQQ or SPY
Step 4: Select the right symbol
Step 5: Chose the start date, the amount you wish to invest in that particular share, the frequency and the length of the recurring investments (by end date or installments)
Step 6: Review and submit the request
Success!
I did likewise for my recurring investments into SPY:
I choose to DCA more into QQQ because I feel that it has more upside potential and the tech sector is still going to flourish in the years to come. I hope you find this sharing useful and please leave any queries you have in the comments. Thank you for reading through!
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