The Vanguard Information Technology ETF is a large cap focused fund offering exposure to the U.S. Technology sector and really, not much else. If you’re looking for something more broad, you’ll probably want to keep searching. However, if you’re in need of tech exposure within the portfolio, you might be well served to see how VGT can drive a portfolio exponentially higher. In the next few paragraphs, I’ll dive into everything I know about the Vanguard Information Technology (VGT) ETF to hopefully assist you in deciding if this ETF is worth your consideration.

Post Agenda

• Overview of Vanguard Information Technology (VGT) ETF
• Key Features of VGT
• Management Strategy
• Historical Returns
• Pros & Cons of VGT
• Investor Suitability
• Final Thoughts

Overview of Vanguard Information Technology (VGT) ETF

Vanguard launched this Information Technology ETF in 2004 just a few years before one of the worst financial crises in many investors lifetimes. During that unfortunate time the VGT ETF declined by nearly 50% but what it did after that has been absolutely incredible, rocketing higher approximately 1,500%. To put that number into perspective, every $100 dollar investment in 2009 would now be worth somewhere near $1,500! $1,000 invested would be near $15,000, and $10,000 would be $145,000!

Absolutely astonishing results in just 16 years. For comparison, a $100 investment in to SPY at the same time would be about $950. Neither are bad that’s for sure but VGT is substantially above the most noteworthy index available. That index being what most everyone in the world views as the “stock market”.

Vanguard has compiled 324 assets into VGT with their top 10 holdings comprising about 60% of the total assets. It includes large cap companies like Apple and Microsoft but does also include some small and mid-cap companies as well, just to a much lesser degree.

Key Features of Vanguard Information Technology (VGT) ETF

The most important characteristic of VGT that investors should keep in mind prior to investing is that the ETF is strongly technology focused. If you were bullish in the tech sector, then VGT may be a perfect fit. However, if you’re bearish or unsure on the large cap technology space then you’ll probably want to avoid VGT completely. Additionally, technology stocks are known for their volatility and strong sell offs when the market becomes weak.

That said, there are several other characteristics that investors should be aware of. We’ll look at many of them below but, diversification, management strategy, historical performance, volatility, and suitability should all be considered against an entire portfolio prior to committing any capital.

Management Strategy

VGT is a passively managed fund tracking the MSCI US Investable Market Index/Information Technology 25/50. That was a mouthful, so I took a closer look at that index’s fact sheet to see if anything glaring stood out. The Information Technology index from MSCI is designed to capture, in their words, “the large, mid, and small cap segments”. And while that’s true, it is slightly misleading with a substantially heavier weighting to large cap equities. That said, anyone considering an investment here would do well to dig even deeper and understand as much as possible.

Vanguard seeks to fully replicate the MSCI index with VGT by investing in the stocks from that index. Though, in some cases, the fund may select a subset of stocks from the index that best capture it’s key characteristics. This can be good or bad but if history is any indication then I’d personally bet there isn’t much to be concerned over in this regard.

Overall, the Vanguard Information Technology (VGT) ETF has made good on it’s low expense ratio and passive management approach. By leveraging these features against the U.S. Technology Sector VGT has been able to deliver returns that closely mirror the underlying index.

Historical Returns

The Vanguard Information Technology (VGT) ETF has demonstrated impressive historical returns, making it compelling to investors wanting technology exposure. Over the past 2 decades, and investment into VGT would have returned above 1,500% with an annualized return of about 15%.

That said, investors in VGT should be prepared for drawdowns. The fund experienced a -50% maximum drawdown through it’s history and took about 39 months to recover from the decline.

Long Term Growth

Over a 20 year period, VGT achieved a compound annual return of 14.64% with a standard deviation of 19%. Meaning, VGT has demonstrated significant growth but also a higher volatility when compared to more conservative investments.

Recent Performance

Over the past 5 years, VGT has delivered a total return of 194% with $100 invested in 2018 growing to about $294 by early 2025. Reflecting the strong growth trajectory of the Technology Sector during this stellar period.

Yearly Returns

VGT has shown variability in yearly returns over the past 5 years. Again highlighting the inherent volatility within the sector. For example, in 2020 VGT returned 30%, in 2021, 46%, and in 2022 a decline of -29%. Underscoring the importance for a long-term investment horizon.

Dividend Yield

While not a dividend focused fund, VGT does offer a meager dividend yield. Currently, a yield of 0.50% can be obtained. However, for patient investors that yield rose as high as 1.20% during the 2022 decline. Still, a small income that may be reinvested back into VGT to aid potential investors in compounding efforts.

Pros & Cons to Vanguard Information Technology (VGT) ETF

VGT is an increasingly popular ETF for investors seeking tech exposure. However, there are some key pros and cons to consider prior to investing:

Pros

• Growth Potential: VGT is designed to grow at a pace that exceeds the broader market.
• Low Expense Ratio: At just 0.10% VGT is a competitively priced ETF.
• Diversified: While VGT is concentrated in the top holdings, it still offers exposure to over 320 different stocks.
• Reputation & Management: Vanguard is a well-respected financial institution. Known for reliable management and low-cost investment products.

Cons

• Concentration Risk: Over 50% of VGT’s assets are invested in it’s top 10 holdings.
• Low Dividend Yield: A yield generally less than 1%.
• Volatility: VGT is inherently more volatile than broader market funds.
• Market Risk: The technology sector experiences larger drawdowns than broader market funds.

Investor Suitability

Investors should consider carefully their risk tolerance prior to an investment in Vanguard Information Technology (VGT) ETF. The suitability of this ETF will depend on several factors, including risk tolerance, investment goals, and portfolio make up.

Growth focused investors will quickly discover VGT is designed to grow and longer term investors will appreciate the quadruple digit returns over an investment lifetime. Still, the risks cannot be understated. If the market turns sour, VGT will decline precipitously, at least historically.

Considerations into an investment of VGT will likely center around sector concentration and those risks. It’s always advisable to limit allocation to lesser diversified funds but that does limit the upside as well. Perhaps the best approach would be to dollar cost average into the fund until a substantial decline occurred before committing the bulk of any capital being allocated.

In short, VGT is suitable for growth focused long term investors comfortable with higher volatility. Possibly best used as part of a broader investment strategy aimed at minimizing risks and maximizing returns.

Final Thoughts

In closing, the Vanguard Information Technology (VGT) ETF has been an excellent fund within my own portfolio. You can have a look at how it’s performing today within the Unqualified Portfolio. I continue to DCA into VGT waiting for a meaningful decline to deploy the lion’s share of my capital. Still, as of today, I’m more than happy with how it’s going. If you want to check out Vanguard’s website related to the fund here is the Vanguard Information Technology (VGT) ETF page as well.

That said, VGT is not without it’s risks and investors would be well informed to heed that warning. As mentioned, the tech sector kind of reminds me of 3x leveraged ETF’s, in that it explodes higher and lower dramatically given the market environment. Just without the drag on performance of leveraged funds.

Regardless, the proof cannot be ignored, VGT has performed remarkably well throughout the past 20 years and I personally expect that to continue. If they return even half the performance over the next 20 years I’d consider my own investment a success.

Until the next post.

God bless,

Jeff

<p>The post Vanguard Information Technology (VGT) ETF: A Detailed Introduction first appeared on UQinvest.com.</p>

With that, I want to dive in to a relatively new fund I’ve invested in, the TSPY ETF from TappAlpha. The fund and the fund manager are both very new to this game so it should be interesting to see how TSPY performs moving forward.

Also, for those interested, I recently watched an interview with the TappAlpha founder and they have some new ETF’s on the horizon. Stay tuned to TappAlpha.com for more on that, I know I was interested in a few he mentioned. If you want to watch that interview here it is on Youtube.com. Lastly, if you want to see how it’s performed for me, find it here in my Unqualified Portfolio.

Post Agenda

• TSPY ETF Overview
• Key Statistics
• TSPY Investment Strategy
• Fund Holdings
• Performance & Yield
• Tax Considerations & Dividends
• Potential Benefits
• Potential Risks
• Key Considerations for Investors

TSPY ETF Overview

The TappAlpha SPY Growth & Daily Income ETF (TSPY) is a new ETF launched in August of 2024. They’re chief aim with the fund is to provide investors with current income while maintaining the prospect of capital appreciation. TSPY is listed on the Nasdaq exchange and is invested in large-cap equities through its SPY holding. The fund has assets under management (AUM) as of today totaling $13.57 million, which is relatively small compared to similar ETF’s.

Key Statistics

As we uncover the TSPY ETF in the sections ahead we’ll have a greater understanding of the fund and how it may perform. However, for now, I thought it would be important to offer some of the most important statistics first for anyone just needing the basics to know if the ETF is for them. If it is, then you’ll be able to follow along below. If it isn’t for you, then you won’t have to venture to far into this post.

• Expense Ratio – 0.68%
• Current Dividend Yield – 13.89%
• Dividends Paid (ttm) – $3.52
• Most Recent Ex-dividend date – January 8, 2025
• 52-Week Price Range – $23.98 – $26.96
• Current Price – $25.39
• Inception Date – August 14, 2024

TSPY Investment Strategy

First, for those wanting to hear the strategy straight from the camel’s mouth, check out this interview with TappAlpha’s founder Si Katara on the Wealth Adventures Youtube channel. That video will provide at least the ability to form an opinion about the funds potential.

The TSPY ETF has a primary objective that is two sided. They first want exposure to the S&P 500 through the SPY ETF. SPY is the largest and most liquid ETF in the world, at least to my knowledge. TSPY’s second objective is daily covered call options for income generation.

TSPY uses what they call “fintech” or proprietary financial technology to constantly evaluate various risk factors and performance. This fintech is designed to provide investors with stable income, capital appreciation, and risk mitigation techniques to improve returns.

Here are the key points to note about the TSPY ETF and their investment strategy.

• Hold SPY ETF shares
• Write OTM 0 Day’s to Expiration (DTE) call options
• Fintech identifies optimal strike prices
• Fintech monitors and evaluates volatility and risk factors
• Potential for TSPY to outperform SPY
• TSPY maximizes time decay through 0 DTE call options

Fund Holdings

TSPY is almost entirely concentrated into the SPY ETF, with 99.5% of it’s assets housed there. Thus, TSPY is just a wrapper around SPY with the daily options strategy included for income. If you’re seeking exposure to another sector or market entirely then the TSPY ETF wouldn’t suit your investment target.

However, if you’re seeking broad market exposure to the top 500 U.S. companies but want to mitigate some downside risk with income then the TSPY ETF may fit the requirement. In all, TSPY is solely focused on the SPY ETF and income generation through options. Thus, return characteristics for the TSPY ETF will follow the volatility and performance of the SPY ETF itself.

TSPY ETF Performance & Yield

As a new fund, TSPY does not have much of a historical track record. Meaning, it’s impossible as I write this to know how the fund will respond during a bear market. Since TSPY’s inception the market has been mostly bullish with SPY returning approximately 8.5% during that period. For comparison, TSPY has returned about 4.5% not including the dividend yield. If you include the current income return of about 4% then TSPY is almost directly in line with SPY on a total return basis.

TSPY has a stated objective of returning about 12 – 14% in income to investors. If they’re able to achieve that target consistently and the above performance continues it would be possible for TSPY to outperform the total return of the SPY shares it holds. For instance, if SPY returned 12% in 2025 and TSPY returned half of that at 6% but also included a 12% dividend, then TSPY would have returned a total of 18% to SPY’s 12%.

This may be wishful thinking given the nature of capping upside with the daily covered call approach but based on the information today, it’s entirely possible. Much of that possibility however rests on the the financial technology TappAlpha boasts and where strikes are placed on each daily call option.

Tax Considerations & Dividends

First, it’s always important to speak with a qualified tax professional to verify claims about TSPY or any fund because I’m not a tax professional.

That said, distributions from TSPY could be treated as either qualified or non-qualified dividends. To be eligible for qualified dividend tax rates an investor must hold TSPY for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. In short, to achieve favorable tax treatment avoid trading in and out of the fund.

Non-qualified dividends or ordinary dividends are generally taxed at the standard income tax rate. Achieving qualified dividend status would tax the income from TSPY at the lesser capital gains rate. Non-qualified dividends are taxed up to 37% depending on an investors tax bracket and the tax on qualified dividends is capped at 20%.

Potential Benefits for TSPY

• Income generation – A target dividend yield of 12 – 14%
• S&P 500 Exposure
• Capital Appreciation
• Liquidity – TSPY is new and liquidity is very light but the underlying holdings in SPY remain highly liquid

Potential Risk Factors for TSPY

• Limited track record as a new fund
• Higher expense ratio at 0.68%
• Concentration risk with most of TSPY held in SPY
• General market risk
• Income variability – yield targets are attractive but may fall during periods of low volatility

Key Considerations for TSPY Investment

To make an informed decision about the potential for an investment in the TSPY ETF an investor must carefully consider their own intended target. Are they wanting market returns at minimum, do they need income today, or are they looking for some mix of both. These are just a few of the possible questions we’ll have to ask prior to an investment into TSPY or any other income focused product. For me, I like receiving the dividends even if I accumulate a lesser total return. It helps me stay focused and provides the psychological benefit of seeing the income deposited to my account. Silly I know but it’s a valuable component for me.

Still, here are some items to consider before committing capital to TSPY.

• Investment Goals – is there a need for TSPY within the portfolio?
• Portfolio fit – does TSPY complement or detract from the portfolio’s design?
• Cost analysis – is the higher expense ratio to high or could a similar return be achieved elsewhere for a lesser cost?
• Tax consequences – every dividend, qualified or non-qualified has a tax implication.
• Long-term or short-term – What is my time horizon?
• Regular monitoring is always important with funds such as TSPY because their strategy may change at any time in an attempt to adapt to changing market conditions.

Final Thoughts

Well, I think I covered everything above but in summation, like other income focused funds, I think TSPY would depend on what you’re after. If you want a higher income and like the idea of generating that income daily then TSPY may fit the bill. Personally, I like the daily options approach because it doesn’t give SPY as much time to climb above the short call compared to monthly calls. However, on large up days TSPY would be at a disadvantage as they attempt to maintain their target income rate. In that instance, monthly calls would become more attractive since they could be sold further from the current market price.

In total, daily income is a preferred strategy for me. I like knowing that I’m not tied to a longer dated option and I can reset my short call regularly. Doing this means I may miss one large upside day but I won’t miss every day’s upside. Whereas monthly calls by comparison could potentially limit upside exposure until the short call is exercised and a new higher call is set.

Until the next post.

God bless,

Jeff

<p>The post TSPY ETF Explained: Balance Income & Performance first appeared on UQinvest.com.</p>

With that, I wanted to take a closer look at an ETF I’ve had a great experience with in the year I’ve owned it. I haven’t seen the growth potential I’d hoped but the higher income has more than sufficed while I wait for QQQ or JEPQ in this case, to continue making new highs.

If you’re interested to learn more directly from JPMorgan’s Website, have a look here for the prospectus, summary prospectus, and several other relevant fund metrics. If you want to see how JEPQ is behaving in my own portfolio, have a look at the Unqualified Portfolio here.

Post Agenda

• Overview
• Investment Strategy
• Expenses
• JEPQ ETF Pros & Cons
• JEPQ Investment Returns
• 3-Year Performance Data

JEPQ Overview

The JPMorgan Equity Premium Income ETF or JEPQ is an actively traded fund and invests in large-cap companies from the Nasdaq 100 index. JEPQ uses a covered call strategy to generate a higher level of income at almost 10% per year, making it very attractive for income seeking investors. Currently, the fund has approximately $21 billion in assets under management with an expense ratio at a reasonable 0.35% given the funds potential.

JEPQ Investment Strategy

JPMorgan uses a popular options strategy combining equity investments with an out of the money covered call. This approach accomplishes the goal of generating an additional income without completely ignoring capital appreciation. Short calls are entered above the current market price but at that point upside appreciation is forfeited in return for the income that is received.

I do prefer this strategy to other funds that chose to sell at the money calls. Those funds may return a higher premium but do so at the expense of any capital appreciation. I just don’t care for a fund that participates in all of the downside and none of the upside.

In any case, JEPQ uses a more conservative options approach and has performed quite well in my opinion. We’ll take a closer look in another section but in the few days of 2025, JEPQ is trading in lockstep with QQQM, the Nasdaq 100 ETF.

Expense Ratio

As mentioned previously, the JEPQ ETF has a respectable expense ratio of 0.35%. For comparison, the SPY ETF has an expense ratio of 0.09% so yes JEPQ is higher but not egregiously so. Making the expense ratio more than competitive for an actively traded fund. SPY maintains a lower expense ratio primarily because of it’s “hands-off” or “passive” approach.

There are no loading fees to speak of and like most ETF’s, no other hidden fees. Every cost is wrapped into that 0.35% expense ratio and at $35 for every $10k invested, it’s more than manageable. It’s likely, we couldn’t replicate JEPQ’s performance for any less in fees if we wanted to go about structuring a similar strategy.

JEPQ ETF Key Benefits

• Well above average dividend yield at approximately 9.7%
• Lower volatility compared to the Nasdaq-100 Index
• Diversified investment into Large-Cap Technology stocks

JEPQ ETF Key Detractors

• Capped upside due to the covered call strategy
• Higher concentration risk to Technology stocks
• Additional complexity from the options strategy

JEPQ ETF Investment Returns

Since inception JEPQ has been providing investors with a great return, including appreciation of about 12% in the past year. Additionally, as of today, JEPQ has captured about 75% of the Nasdaq-100’s upside while simultaneously generating a consistent stream of income. This combination of growth and income has attracted plenty of investors to JEPQ at this relatively early stage and will likely be a deciding factor for many other investors in the years to come.

3 Year Performance Results

Back Test Criteria:

• $5,000 Initial Investment
• $100 Monthly Contribution
• Start Date – 1/14/22

Assuming a $5,000 initial investment and $100 monthly contributions starting January 14^th, 2022 an investment into JEPQ would have become approximately $17,000 throughout the period. The total capital contribution across the 36 month period would be $8,600 for a total return of $8,400 or almost 100% in total return.

Doubling an investment in just a little under 3 years is no easy task. JEPQ has become a star performer within the options ETF space and should these metrics continue, will be well into the future also.

Final Thoughts

JPMorgan has found a winning formula with their JEPQ ETF. By combining the ability to capture upside JEPQ separates itself from other high yielding funds. Many of which not only fail to grow but actually have a decaying share price as a byproduct of their particular strategies. Not exactly a recipe for longer term success.

Still, as it is with any investment, there are good performers and not so good performers. In my opinion JEPQ falls into the better performers camp having virtually doubled an investment over the past 3 years.

At a reasonable expense ratio, approximately 75% of the Nasdaq’s growth potential, and about a 10% yield, JEPQ offers plenty for investors to like. Add to that any yield increases that may result from higher volatility in the years ahead and, I think, there are plenty of reasons to consider this high yielding ETF.

Let me know in the comments what you think of the JEPQ ETF or if another ETF has performed better. I know everyone would like to review.

Until the next post.

God bless,

Jeff

<p>The post JEPQ ETF: Capable Growth, Higher Income first appeared on UQinvest.com.</p>

I wanted to take a few minutes tonight to compare two ETF’s that find their way on to every dividend growth investor’s radar, at some point. At first glance, the two ETF’s seem very similar but are they different? Is DGRO or DGRW the better ETF?

In today’s post we’re going to compare DGRO v DGRW in a heads up battle for the true D-Grow ETF. Let’s get into it.

But first, I hold one of these ETF’s myself. Which one did I think was the best? Check out my Unqualified Investors Portfolio.

Post Agenda

• DGRW Investment Strategy
• DGRO Investment Strategy
• DGRO v DGRW Returns Compared to the S&P 500
• Pros & Cons to DGRW
• Pros & Cons to DGRO
• DGRO v DGRW Key Considerations

DGRW Investment Strategy

DGRW – WisdomTree U.S. Quality Dividend Growth Fund

WisdomTree employs a unique investment philosophy with regard to dividend or dividend growth investing. Rather than focusing, as others do, on just the dividend history, they emphasize a return on equity(ROE) and a return on assets(ROA). Their aim is to find stocks with the potential for future dividend growth. The primary thought is that by focusing on these reliable criteria they may be able to avoid assets simply growing the dividends alone. Thus eliminating assets that may face potential dividend cuts or suspensions.

Additionally, DGRW maintains an above average technology sector allocation. A trait not inherent to other dividend growth ETF’s. With over 30% allocated to technology stocks DGRW hopes to take part in substantial gains within that sector of the market.

DGRO Investment Strategy

DGRO – iShares Core Dividend Growth ETF

IShares follows a more traditional approach to dividend growth investing. They target companies with at least a 5 year dividend growth track record and below 75% of earnings being paid in dividends. This approach to dividend growth investing seeks to find assets offering steadily increasing dividends at a sustainable level.

However, unlike DGRW, DGRO does little to favor one sector over another. Largely the ETF maintains an S&P 500-like profile, allocating capital across a range of sectors equitably.

DGRO v DGRW Returns Compared to the S&P 500

When comparing DGRO v DGRW to the overall market over the previous 10 year period, both DGRW and DGRO have shown competitive performance.

• DGRW: 12.79% annualized returns
• DGRO: 11.49% annualized returns
• S&P 500: 13.46% annualized returns

From a longer term results perspective, investors would have still achieved a higher return investing into the S&P. However, for those needing the higher dividend yield or better yet, a growing dividend yield then both DGRW and DGRO offer a compelling argument. Still, in this instance, DGRW edged out DGRO in annualized returns over the previous 10 years.

DGRW – Pros & Cons

DGRW Pros:

• Focus on quality metrics such as ROE and ROA rather than just dividend increases.
• Higher allocation to technology sector.
• Lower maximum drawdown compared to the S&P 500.

DGRW Cons:

• Slightly higher expense ratio compared to DGRO
• May underperform during strong growth periods.

DGRO – Pros & Cons

DGRO Pros:

• Lower expense ratio compared to DGRW.
• Simpler dividend growth strategy with edge toward dividend sustainability.
• Broader, market-like exposure profile.

DGRO Cons:

• Marginally lower annualized returns compared to DGRW.
• Lower allocation to any specific market sector.
• Higher maximum drawdown compared to DGRW.

DGRO v DGRW Key Considerations

When considering either ETF investment it would be important to think about which strategy better suits you as an investor. Do you like the idea of investing into dividend growth companies based on their returns or through a more straightforward methodology? Both DGRO or DGRW offer investors exposure to dividend growth companies but how they reach that goal is substantially different. Historically, the edge in that department remains with DGRW.

Moreover, investors seeking a focus on quality growth metrics with higher allocation to tech stocks would probably favor the DGRW ETF. However, DGRO’s more traditional approach shouldn’t be discounted to heavily. It’s often said that if it isn’t simple enough to explain to a kid it’s probably too complicated. With DGRO an investor would have a lower expense ratio and an easy to understand investment philosophy.

In all, both ETF’s have a unique offering for investors to consider. Neither ETF has an expense ratio that should send us running for the hills so it really just comes down to which strategy is preferred. Personally, I prefer the higher starting yield with DGRO v DGRW’s lower initial yield. DGRW may ultimately provide more in terms of quote, unquote, dividend growth, but they lag DGRO’s current yield significantly.

In that light, DGRO is my preferred ETF in the DGRO v DGRW debate. Which is highlighted by the significant investment you can see in my Unqualified Investors portfolio.

Until the next post.

God bless,

Jeff

<p>The post DGRO v DGRW: Which Is the Best Dividend Growth ETF? first appeared on UQinvest.com.</p>

Now, let’s focus in on the relatively unknown QQA ETF or, the Invesco QQQ Income Advantage ETF. QQA is an investment vehicle that combines exposure to the Nasdaq 100 Index with an active option income strategy. QQA’s primary objective is to return investors an above average income, improved potential for growth, and all with a reduced volatility profile.

Additionally, QQA is managed by the same company responsible for QQQ. It seems perfectly reasonable to me to ask the question; who knows the QQQ ETF better than that funds own management team? This alone makes QQA an interesting, albeit newer contender to the income ETF space.

Finally, if you want to see how QQA is performing within my portfolio, you can check it out on my Unqualified Investors Portfolio page. If you’re looking for an income ETF that tracks the S&P500 then you may want to have a look at this recent post; “SPYI v ISPY: 1 Clear Winner between Two High-Income ETF’s”.

Post Agenda

• QQA ETF Overview
• Expense Ratio
• Liquidity
• Risk Overview
• QQA ETF Pros & Cons
• Investor Suitability

QQA ETF Overview

The QQA ETF is a new fund with only 6 months of history as of today. They were launched on July 17, 2024 with the chief goal of providing potential investors an above average income. Additionally, the fund seeks to maintain some of the growth prospects of the QQQ ETF they track.

The fund, through the use of ELN’s or Equity Linked Notes, creates a covered call strategy similar to that of JEPI or the JPMorgan Equity Premium Income ETF. The structure of the ELN, essentially a covered call, creates a premium that is then returned to investors.

The QQA ETF Fund Prospectus does make it abundantly clear they intend to track the underlying with what they call, a “full replication” methodology. Essentially, they hold an equal percentage of the investments within the QQQ ETF itself. Then, through the use of the aforementioned ELN’s, generate income. Not as clean as I would prefer but it has become pretty standard within the income ETF industry.

While the above strategy is their primary objective the prospectus does also mention something I haven’t seen elsewhere. Shortly into the “Principal Investment Strategies” section they mention the ability to hold additional derivative products as a hedge against adverse market movements. While the benefit, if there is one, remains to be seen it is nice to know that the fund doesn’t have to sit on their hands if the market begins to fall preciptiously.

QQA ETF Expense Ratio

QQA has bucked the prevailing trend in the high yield ETF space by making their expense ratio among the lowest I’ve seen today. With income or Nasdaq-100 income funds popping up seemingly by the day, I believe those that offer the best value will eventually become favored. But, that’s just my opinion.

Regardless, QQA has an expense ratio of just 0.29% which is lower than the wildly popular JEPI or JEPQ ETF’s both maintaining a 0.35% expense. Additionally, QQA has waived their expense fee until June 30th, 2025. Making their current expense ratio a whopping 0.00%! Not a bad proposition for a fund that largely mimics the two income focused alternatives I mentioned.

Liquidity

To say liquidity has been light would be an understatement at this time. However, given the brand power of Invesco and their flagship ETF, QQQ, I suspect that won’t last for long. But again, that’s just my opinion. If Invesco never advocates or markets QQA then liquidity may continue to flounder.

As of today, the ETF has an average daily trading volume of just 21,158 shares. Compare that to JEPI’s average volume of over 3 million and it’s clear they’re way behind the curve. That said, JEPI has existed since May of 2020 so it’s not exactly a fair comparison.

In all, liquidity just isn’t there at present and work needs to be done advocating for QQA throughout the investment community. If they do, then I believe investors will recognize the value proposition when considering their next income focused ETF.

Risk Overview

Investing in QQA, as with all equity investments, carries some degree of risk. Market risk, at today’s lofty valuations couldn’t be overstated and only time will tell how QQA weathers the eventual decline.

However, when considering QQA specifically there are a few risks to highlight;

• Sector Concentration Risk – The fund is heavily weighted to the technology sector.
• Options Strategy Risk – Limits potential upside appreciation potential.
• New Fund Risk – QQA has a limited operating history.
• Liquidity Risk – May be difficult to close a position during a tumultuous period.
• ELN Risk – Typically unsecured debt.

Now, while those don’t sound exactly appealing, keep in mind they aren’t unique to the QQA ETF alone. These newer risks are quickly becoming par for the course with regard to income focused investments. Only in time will we learn exactly what and how these risks reach out to sting us as investors.

QQA Pros & Cons

Like any income focused ETF the greatest pro in their favor is the higher income potential. Thus, I’ll avoid it in my discussion below, but do know that is largely the greatest pro to owning QQA or any income investment.

QQA ETF Pros

• Exposure to the technology sector and the innovation they provide.
• Lower volatility profile and downside profile inherent to higher yield investments.
• Lower expense ratio than similar funds and a zero expense ratio until June 30th, 2025.

QQA ETF Cons

• Limited track record with minimal performance history, as of today.
• Potentially reduced upside appreciation prospects.
• Complexity of the funds income production through ELN’s.

Investor Suitability

Primarily, QQA is most suitable to investors seeking higher monthly income. However, investors wanting exposure to the Q’s with some downside protection may also enjoy QQA. This lower volatility profile may be preferred with valuations where they are today.

That said, the fund does seek to appreciate and a longer time horizon investor would also be rewarded. Both through income today and appreciation over time.

Still, investors should consider the risks carefully and determine if it suits their particular tolerance. The relative newness of the fund coupled with current liquidity concerns may mean the juice isn’t worth the squeeze.

Final Thoughts

In all, the fund is new and with that comes a great deal of unknown. Not a feature most investors are particularly comfortable with. That said, everything was new at some point and avoiding QQA on those grounds alone may mean missing a great opportunity. The fund does offer an above average yield, currently around 10%, and the ability for management to take action if needed. Add to it the ability to invest into the QQQ but with a guaranteed higher income and the prospects for the fund are certainly there.

Still, the risks are real and only time can answer the bigger questions we all have. Will this fund exist in 5, 10, or 20 years? How does the fund perform if QQQ falls by 20% or more? All great questions and I guess if you’re up for it, meet me back here in 2030 and we will see.

Until the next post.

God bless,

Jeff

<p>The post QQA ETF: A Guide to the Invesco QQQ Income Advantage ETF first appeared on UQinvest.com.</p>

Now, on to discussing these two ETF’s. Are they the same? Is one better than the other?

In the world of ETF’s, SPY v SPLG stand out as two very popular options among investors seeking S&P 500 exposure. They both track the same benchmark but there are some distinct differences that may appeal to different types of investors. In today’s post I’ll be discussing several of their similarities or differences, along with some pros and cons to each ETF.

To begin our debate of SPY v SPLG, here are links to each funds website if you wish to review further.

• SPY – SPDR S&P 500 Trust ETF
• SPLG – SPDR Portfolio S&P 500 ETF

Additionally, here is a link to my Unqualified Portfolio that you may like to view. Currently, I hold SPLG but do occasionally trade in either SPY or the SPY options market. And for those new to growth investing here is a detailed guide I wrote on the topic; Growth Investing 101.

Post Agenda

• SPY Overview
• SPLG Overview
• Key Similarities
• Key Differences
• Expense Ratio Comparison
• Liquidity and Trading
• Risk and Volatility
• SPY Pros & Cons
• SPLG Pros & Cons
• Investor Suitability

SPY ETF Overview

SPY is often referred to as “the spiders” and is among the oldest, most well known ETF’s in existence today. In fact, it has become one of the largest and most liquid ETF’s in the entire world, with unmatched trading volume or liquidity.

SPY is passively managed and aim’s to replicate the performance of the S&P 500 index. The S&P 500 or simply, “the S&P” is a market-cap weighted index of 500 large-cap stocks, representing approximately 80% of the United States stock market.

SPLG ETF Overview

SPLG, in my opinion, is SPY’s little brother. However, in recent years has gained considerable popularity given their lower expense ratio. Essentially, making it a more cost effective option for investors wanting exposure to the S&P 500 index.

SPLG is passively managed and seeks to replicate the performance of the S&P 500 index as well.

SPY v SPLG Similarities

• Both SPY & SPLG invest in the same 500 companies that make up the S&P Index
• SPY & SPLG use a similar weighting ideologies
• Both ETF’s aim to provide investors with exposure to large-cap equities

SPY v SPLG Differences

• SPY is structured as a unit investment trust
• SPLG is structured as a typical ETF
• SPLG has a significantly lower expense ratio compared to SPY
• SPY has considerably higher trading volume compared to SPLG

Expense Ratio Comparison

The most notable difference investors will find between SPY v SPLG is the expense ratio.

• SPY – 0.09% expense ratio
• SPLG – 0.02% expense ratio

The lower expense ratio of SPLG can lead to remarkable cost savings over a long period of time. For perspective, on a $10,000 investment over 10 years (assuming 5% return CAGR) you’ll pay $124 to hold SPY and only $26 dollars for SPLG. Over 20 or 30 years the difference becomes even more pronounced.

Liquidity and Trading

Liquidity is simply the ability to buy or sell. It essentially means there are plenty of buyers or sellers at any given time. Further, highly liquid assets have narrower bid/ask spreads. The bid/ask spread can be explained as, at any given moment, the amount we could buy and sell the ETF for. For example, at 10:30am we may be quoted $605.34 bid to $605.36 ask. If I bought the ETF at the ask of $605.34 and then immediately sold it at the bid of $605.34 I would lose the $0.02 cents. Lesser liquidity would just widen that spread.

SPY Liquidity and Trading

SPY is well known for it’s incredible liquidity.

• SPY has narrow bid/ask spreads
• Ability to execute any size trade without issue
• Very suitable to short term strategies or institutional investors

SPLG Liquidity and Trading

SPLG has ample liquidity for most investors but does trail behind SPY.

• Slightly wider bid/ask spreads
• While possible, less frequently used for short term strategies
• Typically suitable for retail investors wanting to buy and hold

Risk and Volatility

No SPY v SPLG debate would be complete without a volatility or risk comparison. Both ETF’s do track the same S&P 500 index so their profiles are similar. Here is what the recent data suggests.

• SPY volatility – 4.07%
• SPLG volatility – 4.16%

The difference in volatility is almost negligible for most investors and is likely due to tracking or management errors within the fund itself.

SPY Pros & Cons

SPY Pros

• Unrivaled liquidity and trading volume
• Narrow bid/ask spread
• Most popular options market
• Popular ETF that is well known worldwide

SPY Cons

• Higher expense ratio compared to SPLG
• Slightly less tax-efficient than SPLG

SPLG Pros & Cons

SPLG Pros

• Lower expense ratio compared to SPY
• Slightly better tax efficiency
• Suitable for long term buy and hold investors

SPLG Cons

• Lower trading volume and liquidity
• Less popular options market

Investor Suitability

SPY Suitability

SPY ETF is generally better suited to active traders requiring unmatched liquidity or institutional investors moving large positions. Additionally, options traders can deploy every possible options strategy in existence or deploy exotic strategies at will. The options market is among the most liquid currently available.

SPLG Suitability

SPLG is ideal for the long term buy and hold investor wanting exposure to the S&P 500 index. Moreover, SPLG boasts a significantly better expense ratio for investors holding the fund over many years. SPLG has become a favorite among newer investors or investors preferring the more traditional ETF structure.

Final Thoughts

While the SPY v SPLG debate may continue on into the future, it seems clear to me that holding one over the other is mostly trivial and could only be determined by a few factors. If you’re looking for liquidity or a shorter duration investment then SPY is likely preferred. Additionally, since SPY is the most recognizable ETF in the world some of the most sophisticated traders are involved in that market. For a newer trader or investor wanting to cut their teeth with the big boys they really need not look elsewhere. Successful traders in this market can be reasonably confident they’re strategy or system is a capable one.

On the other hand, SPLG is emerging as quite the contender. With retail investors becoming more and more common SPLG has certainly garnered a respectable name across the industry. Should you be seeking a long term buy and hold investment then SPLG is the clear favorite with the lower expense ratio.

In the end, when considering SPY v SPLG the fund you choose will be dependent on what need is most important. Both ETF’s track the same index and as we’ve seen have similar risk profiles. Making the true determining factor for SPY v SPLG, speed vs longevity.

Until the next post

God bless,

Jeff

<p>The post SPY v SPLG: Which S&P 500 ETF is Right for You? first appeared on UQinvest.com.</p>

In the ever-changing world of ETF’s, investors are constantly seeking opportunities to maximize their returns while also managing their risk. Two ETF’s that have garnered significant attention recently are the NEOS S&P 500 High Income ETF (SPYI) and the ProShares S&P 500 High Income ETF (ISPY). Both funds aim to provide investors with high income from the S&P 500 index, but they employ different strategies. In this article, we’ll dive into the comparison of SPYI v ISPY, exploring their similarities, differences, and potential benefits for investors.

Post Agenda

• SPYI Fund Overview
• ISPY Fund Overview
• SPYI v ISPY Strategy Comparison
• SPYI Pros & Cons
• ISPY Pros & Cons
• Risk & Volatility
• Who is SPYI Appropriate for?
• Who is ISPY Appropriate for?

SPYI Fund Overview

SPYI is an actively managed ETF launched by Neos Investments. The fund’s primary objective is to generate high monthly income for investors while maintaining exposure to the S&P 500 index. SPYI employs a strategy that involves investing in the S&P 500. These holdings earn dividends and the income is enhanced with an options strategy.

ISPY Fund Overview

ISPY, on the other hand, is a passively managed ETF launched by ProShares. This fund tracks the performance of the S&P 500 Daily Covered Call Index. They seek to provide investors with high income through a combination of equity exposure and option premium.

SPYI v ISPY Strategy Comparison

When comparing SPYI v ISPY it’s important to understand the nuances of each fund. Let’s discuss several different characteristics of to highlight how each attempts to benefit investors.

SPYI’s Strategy

SPYI’s strategy is comprised of four main components;

1. Holding S&P 500 Stocks
2. Collecting Dividends
3. Covered Call Options Strategy
4. Long OTM Call Options

The fund sells call options on the S&P 500 index to generate additional income. However, they differentiate themselves by re-investing some of those proceeds into long out of the money call options. Most covered call funds in existence simply sell the calls to increase the income but SPYI attempts to capitalize on some of the upside beyond the short call by purchasing these additional calls.

ISPY’s Strategy

ISPY employs a covered call strategy but they do it through the use of swap agreements. Strong 2008 vibes anyone? Regardless, the strategy is pretty easy to understand, they;

1. Invest in S&P 500 Stocks
2. Sell Daily Call Options on the S&P 500 Index through swap agreements

ISPY seeks to follow the S&P 500 Daily Covered Call Index while also returning investors an above average income. Additionally, ISPY may receive dividends from their holdings. In all, the strategy is mostly straightforward, ignoring any risk from those swap agreements, the fund aims to generate a consistent income by selling covered calls on a daily basis.

SPYI Pros & Cons

No comparison would be complete with out a succinct list of pros and cons for a potential investor to consider. Below I’ve provided what I believe are several of the most important items for consideration.

Pros

1. Active Management could allow for future optimization
2. Additional upside participation, beyond the short call
3. Consistent monthly income
4. Tax Efficiency through the use of Index options
5. Diversified approach

Cons

1. Higher expense ratio – 0.68%
2. Additional complexity and management error
3. Limited historical data
4. Potential for underperformance
5. Reliance on the options market

ISPY Pros & Cons

Some of the factors affecting or contributing to SPYI are also present with ISPY. Both funds seek similar objectives, only through a different approach. The most notable, in my opinion, are listed below.

Pros

1. Lower expense ratio – 0.55%
2. Simpler Options Strategy
3. Stronger initial performance
4. Potential for lower volatility
5. Passive management may appeal to some investors

Cons

1. Swap agreements make me uncomfortable
2. Limited historical data
3. Less flexibility with passive management
4. Higher portfolio turnover from daily call options
5. Dependent on the S&P 500 Daily Covered Call Index

Risk & Volatility

To fully compare SPYI v ISPY, risk and volatility are important factors to consider. From a volatility perspective, ISPY exhibits slightly higher volatility day-to-day. As of this writing, ISPY has a daily average range of $.45 where as SPYI has a daily average range of $.39. Not a significant difference but certainly something to keep an eye on.

Neither fund is without it’s risk. Chief among those risks is the limited historical data available for both funds. Ideally, I think we’d all prefer to see how they perform during a bear market before contributing our limited capital. Still, from a return perspective, it’s hard to ignore ISPY’s commanding lead. As of tonight, ISPY has returned north of 12% in price appreciation compared to SPYI’s sub 7%.

In all honesty, no one knows how either fund will perform when the market eventually does roll over. Neither has been in existence long enough for this valuable data. On the surface, an argument could be made that additional income will buoy these funds compared to their growth focused peers. A feature both funds are eager to promote, but with such limited data the jury is really still out on how either ETF will perform.

Who is SPYI Appropriate for?

• Investors seeking income through active management
• Investors seeking income through options
• Investors wanting additional upside in a bullish market environment
• Investors prioritizing consistent monthly income

While each investor is different, I think these are some of the more important features for consideration.

Active management could be debated at length but the upside is a more flexible approach. Sure, this flexibility could lead to other problems but it could also lead to solutions to problems so I guess that knife always cuts both ways.

In all, SPYI is probably more suitable to someone wanting complete transparency. Their approach just seems more clear and isn’t clouded by whatever fully constitutes a swap agreement. Though, similarly, the strategies SPYI employs may be reason enough to avoid them just the same.

Who is ISPY Appropriate for?

• Investors preferring passive index based strategies
• Investors preferring more traditional covered call approach
• Investors seeking a lower expense ratio
• Investors prioritizing consistent monthly income

If you’re seeking a passive approach and wanting to avoid the cost of long out of the money options then ISPY could make sense. I personally feel more aligned with SPYI but I also hold ISPY. If you’re interested to see how each of these holdings is performing for me you can view my Unqualified Portfolio here.

Still, to date, ISPY has performed significantly better than SPYI and they also boast a lower expense ratio, I don’t see how anyone would argue with that.

Final Thoughts

Well that about wraps up our SPYI v ISPY comparison. Honestly, it’s getting confusing keeping up with all the new offerings in the income investment space. These two ETF’s specifically, confuse me on almost a daily basis given the similar symbols.

Regardless, I hold both investments and don’t have plans to dump either of them at this time. Both have provided a consistent and similar income. SPYI has returned slightly more in income but they’ve also performed slightly worse overall, so by total return ISPY is performing better.

In closing, to determine which ETF is more appropriate for you would come down to the features you prefer. If you want a lower expense ratio then ISPY is the clear winner. Should you prefer a higher level of income then I think SPYI is more acceptable. If you’re seeking higher total returns, you should probably consider other alternatives first, but in the SPYI v ISPY debate, ISPY is the winner.

God bless,

Jeff

<p>The post SPYI v ISPY: 1 Clear Winner between Two High-Income ETF’s first appeared on UQinvest.com.</p>

With that, I’m going to round out my foundational investment series with what may be the least favored among investors today. Value investing historically has been a winning formula but that hasn’t been true in the age of easy money.

Let’s uncover some of the most important concepts as they relate to value investing with hope we can identify if this sleeping giant will ever wake again.

Of course, I’m not an investment professional and this isn’t a recommendation to ever invest. Always conduct your own due diligence or be sure to speak with someone who has.

Post Contents

• What is Value Investing?
• Defining Characteristics
• Is Value Investing Dead?
• Quality over Quantity
• Ironclad Fundamentals
• Against the Crowd
• Performance Characteristics
• Downsides to Value Investing
• Value Traps
• Value Investing Tools

What is Value Investing?

Value investing is foundationally about finding companies or assets that are currently undervalued. However, no one person or group seems to agree on what constitutes a value. For some, Microsoft at $400 is a value, to others value won’t be seen until $300, and so on.

Valuation of an asset heavily manipulated by emotion and other market forces is no easy task. However, the belief among value investors is that over time the share price will follow the fundamental dynamics of the business. Historically this has been true, with the S&P 500 climbing higher over time.

Overall, value investors intend to identify segments of the market currently out of favor or out of alignment with their fundamental data. Invest while price is low and profit from the inevitable rise in price before wall street or main street gets in.

Personally, I’ve elected to focus on value investments in the form of ETF’s. You may be interested to view my holdings current performance in real time by visiting my portfolio page.

Defining Characteristics

There are several traits to a valuation candidate that investors would do well to identify. As a sidenote, for those investors with an affinity towards value investing it isn’t uncommon they find treasure where everyone else sees trash. By uncovering data others haven’t yet identified prior to a trend value investors could see outsized returns.

Regardless, these characteristics are a much needed starting point for any value seeking investor.

• Disparity between financial data and share price
• Forward leaning business model
• Products or services on the horizon
• Extraordinary management
• Consistent cash flow

Truly, not an exhaustive list but rather an introduction to the types of information a value investor might seek to identify. The most astute or determined of this investing class will undoubtedly return a host of criteria average investors may never think to consider.

Still, this approach might prove to be more risk than reward. For example, uncover an extraordinary management team but later find they offer an inferior product or service would more than likely result in further price declines.

Is Value Investing Dead?

No one truly knows that answer but it would seem in today’s market growth assets or income generators do receive the most attention. That said, valuing stocks is anything but dead as countless market participants take to social media with their value proposition for one stock or another.

In an effort to find an answer to this question, here is an article from Cabotwealth.com providing some appropriate context for the state of value investing. Certainly not dead, just evolving. For example, value investors may find it difficult to prove the worth of a new technological advancement. Will artificial intelligence revolutionize the world or is it a neat parlor trick? As of today, it appears the former but to what extent would a value investor be able to identify or capitalize on that knowledge? That is what value investors are intending to find.

While we can say certainly value investing isn’t dead. Finding that value has never been more difficult. Meaning, true value focused investors have likely adopted a hybrid approach wherein they seek to find value within a particular growth prospect.

Quality over Quantity

A lesson I learned far too late in life is that more is not better. Traditionally, it was common for a value stock to boast a below average share price. Only helping to identify good companies experiencing a temporary slump. Today, value may still be found in those assets currently at or above a fair market value.

A quality asset is a quality asset no matter what investing label is applied. It is more than possible to find value in a growth stock or growth in a value stock. A through understanding of this fact would assist a potential investor from avoiding an opportunity simply because it didn’t fit neatly into a predefined category.

Sustainable high quality value investments generally possess, among other attributes; strong financial metrics, a competitive product or service, a capable management team and even an attractive share price. Market participants would be well served to also identify those value candidates having existed through numerous market cycles.

Ironclad Fundamentals

Before we look at some of the financial characteristics inherent to a traditional value investment it’s important to note that this list isn’t intended to be exhaustive and it may be proved shortsighted in today’s market environment. Still, the criteria outlined here will more than assist a potential investor on their quest to finding an underperformer.

I’ll start with a focus on those criteria that improve shareholder yield. Items that return value to the shareholder would be share buyback programs, dividends, or debt reduction initiatives. An investable asset prioritizing these traits would be first on my list of possible investments. Neglecting these items wouldn’t necessarily eliminate the opportunity but would seriously undermine the investment, in my opinion.

Next, an identification of those assets currently below their net asset value may also prove useful. Net asset value is determined by subtracting total liabilities from current assets. Additionally, a low price to sales ratio could indicate an under valuation, especially if it were true in comparison to comparable peers.

Finally, I’d seek to identify those investments boasting terrific free cash flow growth, an improving debt to equity profile, and the defensive characteristics of such an asset.

Again, please take notice that this is indeed an unqualified approach to value investing. These metrics and many others would likely be required to develop a complete investment thesis. Though, identify an asset fitting these criteria and the foundation for an investment would be compelling.

Against the Crowd

Possibly a hallmark characteristic to any great value investor is their ability to invest where few others would. To invest in this space when everyone else is running the other way would take a level of fortitude and insight that I myself do not have.

Though, in an ever changing market environment this approach carries a well above average level of risk. Investing in and of itself means accepting the risk of loss but to assume that risk when an asset could be outright failing would I believe be known as, “catching a falling knife”.

To those few investors preferring to move against the crowd, I offer you an even greater word of caution. Contrarian investing is far from the easiest path and one I know I’m myself could not follow.

Performance Characteristics

Since the financial crisis of 2008 true value investors have become more and more rare as growth or income investors abound. In fact, the underperformance value investors have endured is even more concerning considering this article from Alphaarchitect.com. Admittedly, the article is quite dated as of today so more research would need to be conducted to better understand the value to value investing.

The primary performance hindrance to value investing rests solely, in my opinion, on the technology sector. From 2008 when the first iphone was introduced our world has seen broad technological advancements with even more on the horizon. As I write this today, electric vehicles are the norm and flying electric taxis are already shuttling people around. Artificial intelligence is becoming real intelligence and investors are lining up to invest. There are sure to be hiccups on this wave of technological advancement but they may be too few and far between to benefit the old school value investor.

However, there is light at the end of this considerably dark tunnel. When covid-19 shut the world down, value investors again had a brief moment of victory. With growth stocks falling precipitously investors were flashed backward in time to that period when investors must conduct due diligence to realize a market gain. In today’s market, to earn a sometimes outsized return means simply buying into the latest trend.

That said, it’s imperative that value investors remember that nothing lasts forever. When cutting edge technologies begin to wain or public opinion ultimately sours then value investing may once again have its day. Until then, tread cautiously and carefully ahead.

Downsides to Value Investing

Possibly the greatest downside of any investment technique in existence would be the classic value trap. Essentially a value trap is a formerly good business that is slowly getting worse over time. These assets may still boast a respectable financial profile but that profile is weakening, even if it isn’t plainly visible.

As I write this today, an asset or really an entire asset class that fits this criteria is the financial technology sector. Paypal and SoFi come to my mind. In fact, a simple reddit search will return an ongoing debate about the merits of either company. Will they turn around in the future, I’m not sure, they may indeed be a classic value play but that would be where the true value investor digs in to find out.

Pulling at that thread, it should also be stated that not all cheap stocks would be value investing opportunities. Some indeed may go on to outperformance but most will be relegated to the pages of history. Making the value proposition to value investing even more of a question mark.

Finding a value candidate worthy of consideration also requires an outsized amount of work researching and studying endlessly with hope to find some detail everyone else has missed. This could only be viewed as a downside when it would be just as easy to pile our investment capital into the likes of Nvidia and earn a return with currently no downside in sight. As I write this today, Nvidia has indeed entered the stratosphere and their performance has largely carried the indexes to continual all time highs.

Ultimately, the list of downsides to a potential value investor is a long one. Entering this space without a carefully, and I do mean carefully crafted plan would be ill advised. Though, as I’ve mentioned, nothing lasts forever and value investing is sure to one day return to relevance.

Value Traps

Briefly mentioned above, value traps are deserving of an entire subsection. Thus, the importance of avoiding this age old mistake couldn’t be overstated. In my experience, the bulk of the stock market should probably be quantified as a value trap. In a time of ultra connectivity and marketing masterminds companies will stop at nothing to convince investors or consumers of their superiority. An ability to avoid this potential distraction would likely mean your a robot or very highly trained.

Value traps are so difficult to avoid because they play on the classic value proposition. Often having financial criteria or other characteristics similar to that of a good business currently experiencing a tough period. Ask anyone in the investing community and they’ll tell you of Apple or AT&T in the 80’s or 90’s and those stories inspire us all to invest. Still, most companies are not Apple or AT&T so investing limited capital into any asset that the investor couldn’t prove without any doubt would more closely align with gambling.

Lastly, and again this couldn’t be overstated. Accounting professionals have an uncanny ability to make lemonade out of a business’s lemons. While the SEC is always investigating fraudulent activity they will never catch every company fudging the numbers. Our hope as investors is that this practice remain only in the movies but however unfortunate. It happens and probably more than any of us will ever know.

Value Investing Tools

With the value investing landscape more challenging than ever before I felt it important to include a few tools that may make a value investors job a little easier. These are all tools I myself have used so I trust they provide accurate and valuable information. However, I’m limited to my own experiences so anyone considering this investment approach would do well to continually seek out those tools that may offer an edge for the future.

• Finviz.com
• Ycharts.com
• Fastgraphs.com
• SeekingAlpha.com
• SEC.gov
• SEC.gov/edgar
• Value Investing PDF
• Reddit.com/valueinvesting

Final Thoughts

With a relatively full view of value investing now behind us it will be imperative that the aspiring value investors of tomorrow not repeat the mistakes of the past. While there may be a laundry list of reasons to avoid this style of investing, those willing to do the work will earn the rewards. That, I’m convinced, will always be true, no matter to what facet of life it relates.

The very nature of value investing is compelling to our logical brain. We are hard coded by God to seek out the value proposition in every area of our lives. This is even more true as we seek to find valuation discrepancies within the market.

But I hope you’ll remember this, the road may be rigged to explode and the morally corrupt among us are only interested in their own gain. No doubt telling you at every step what you should be doing or why your just plain wrong. Still, to the value investor born for it, every distraction will serve only as proof they’re doing exactly what they were made for.

Until next time.

God bless,

Jeff

<p>The post Value Investing 101: Identifying Undervalued Investments first appeared on UQinvest.com.</p>

Now, on to the fourth of five foundational investment styles, dividend growth investing. Of the many popular investment styles, dividend growth investing may just be a little of every style rolled into one. I suppose ultimately that will be for you to decide but it’s an investing method that fits me very well and one that I’m currently implementing in my own portfolio.

Let’s get into the details and when we’re done you’ll have a fantastic understanding of the dividend growth technique and it’s many benefits.

As always, I’m not a financial advisor and this isn’t a recommendation. Just my attempt at highlighting some of the critical elements to an often misunderstood investment style.

Post Contents

• Growth or Dividend Growth?
• Compounded Returns
• Staples and Income
• Performance Qualities
• Risk Management
• Passive Income
• Yield & Payout
• Growth Prospects
• Diversification: Do I need it?
• Dividend Kings, Champions, Aristocrats, Contenders, & Achievers
• Uncle Sam & the Tax Bill
• Downsides to Dividend Growth Investing
• Dividend Cut, oh my!

Growth or Dividend Growth

Not to be confused, growth and dividend growth are indeed two separate concepts. I discussed growth investing in detail here, growth investing 101. Dividend growth investing however is in regards to a dividend paying company consistently raising their dividend payment. Not necessarily a growing share price or revenue growth. A key difference that shouldn’t be misinterpreted.

While both styles of investing can experience share price appreciation, dividend growth investors generally prioritize those companies keen to increase their dividend payment at regular intervals. The allure, is the ever growing passive income stream. Possibly one of the easiest avenues to earning an income. Many investors seeking this style of investment have big dreams of one day living comfortably from the dividends alone and with many years of dividend growth they may just be on too something.

This style of investing isn’t new and it’s an approach that has stood the test of time. Many are the investors before us that have used this method to weather difficult economic periods. The advantages to dividend growth investing are mostly clear to see as passive income abounds. Although, with every investment there are downsides and we’ll discuss several ahead.

Compounded Returns

As is the case with dividend investing or income investing, dividend growth investing at it’s core aims to parlay this growing cash dividend into a veritable cash printing press. The ability to re-invest this additional capital is, in my mind, similar to a company retirement match program. Only here, the employer, or the business as it were, is matching at an increasing rate. Not generally something you’ll see from an actual employer match program.

Still, the power of re-investing these seemingly modest raises can have an outsized impact over an investment lifetime. Feel free to play around with this dividend growth calculator to get an idea what may be possible.

For example, a $10,000 dollar investment with $500 contributed each month would grow to nearly $1.3 million if the return average was 7%. Additionally, the income each year would total more than $150,000. Shocking to see but the math is there. The real question is whether our investments can earn that 7% year over year return and whether we’re able to stay the course through good times or bad.

That said, historically the S&P 500 returns approximately 10% each year so I do find some comfort in that. For fun, averaging 10% YOY would result in a portfolio value of $1.9 million and an annual income of $235k. These calculators are always fun but only time will confirm their worth. In my experience, real world math can be dramatically different than spreadsheet math.

Staples and Income

Generally speaking, dividend growers are already established firms dominating a particular market segment. Think Coca-Cola or Walmart. While much of their growth has already been experienced these companies agree to return an increasingly larger dividend to shareholders as an incentive. When inflation or prices increase so too does revenue generated from these firms. Often, these companies have become so dominate in their respective spaces it would be virtually impossible for another to supplant them.

By investing into a dividend growing asset, investors may take refuge knowing their vehicle of choice isn’t easily eliminated. And in a market rife with uncertainty, that can be a deciding factor.

Companies able to consistently grow their dividend mean shareholders income increases on auto-pilot. Making dividend growth investing, frankly, unmatched in that regard by other investment philosophies. This additional income could be used even during prime earning years to pay bills, take vacations, or simply be re-invested. The possibilities for what to do with the additional capital remain yours but if history or those dividend calculators are to be trusted, re-investment is probably best.

Before I move on, it isn’t necessarily common for a company to have experienced this level of growth or success and there is no guarantee they’ll continue to in the future. As such, companies paying an ever increasing dividend are usually those providing products or services to our every day lives. Similar to the above mentioned Walmart or our electricity company. Meaning, careful thought should occur before becoming too heavily invested into a relatively small subsection of a much larger market.

Performance Qualities

Considering what we already know with regard to dividend growth investing much of their future performance may well be tied to their dividend increases. As discussed, companies having grown their dividend for 10, 20, 30, or even more years aren’t the status quo. There simply isn’t enough market for every company to achieve this status. With that, it remains imperative that a potential investor consider fully the performance characteristics of an asset. Or said another way, potential for underperformance in comparison to another asset or investment technique.

History is on our side however with stories as outlandish as uncle Ned’s record breaking bass catch that somehow magically, “got away”. The difference though, many of these stories are true and we all know Ned didn’t catch more than a buzz!

There are indeed many truthful studies having shown dividend growth stocks outperforming their non-dividend counterparts. For example, here is an article from Hartfordfunds.com with several references about the power of dividend growth over time. The key takeaway is that much like the entire stock market, dividend growth stocks ebb and flow in and out of favor among investors. Still, the performance is plain to see and over time a growing dividend re-invested can perform admirably.

Risk Management

No matter the investment style we adopt risk mitigation should remain at the forefront of our decision-making process. Having learned from experience that neglecting risk is a costly mistake. Established dividend growers are inherently risk averse since most operate, as mentioned, in markets we need in good times or bad. I honestly doubt people are going to stop needing Johnson & Johnson’s motrin during a time of recession. If anything, those sales should improve.

Dividend growth investing, in a way, knocks down several birds with one stone. It allows an investor the opportunity for growth, dividend growth, and to some extent an internal risk control mechanism. By investing into dividend growth assets an investor may find additional comfort knowing two simple truths. One, these companies can still thrive during a contractionary economic period. Two, dividend growth stocks often find favor among other investors during heightened periods of uncertainty. Characteristics hard to find elsewhere except maybe bonds, treasuries, or other fixed income investments. Which, by the way, don’t offer even a hint of growth above their current rate.

Lastly, and the very reason to consider dividend growth investing, is the dividend. During uncertain periods, true dividend growers maintain and even increase their dividends like clockwork. With a steady income stream, favor during economic turmoil, and a non-stop revenue stream, dividend growth investors may prove to be the most prepared investing class of them all.

Passive Income

Simply stated, passive income is money earned that we haven’t lifted a finger to receive. Possibly the greatest form of income, passively earning is what millionaires, billionaires, and even trillionaires are made of. Those claiming this title have done the work and now receive their “mail box money” as I’ve heard it called.

Dividend growth investing fits comfortably here in that as an investor the only work we’re required to do is invest in a similar asset. After that, the investment will spin off income at regular intervals and no additional input would ever be required. However, most choose to re-invest their passive income back into the holding or into a similar broad index with the intention of compounding the investment.

No matter the desired use for this stream of income those choosing to invest into dividend growers are increasingly rewarded for having done so. A facet no other investment class could claim.

Yield & Payout

Yield as it’s commonly referred, is a measure of the dividend amount compared to the current share price. For example, a company with a $100 share price and a $2 annual dividend would have a dividend yield of 2%. $2/$100 = .02 or 2%.

Payout or payout ratio is a measure of a companies earnings paid out as dividends, expressed as a percentage. For example, suppose a company’s net income was $1 million and it pays out $100k in dividends the payout ratio would be 10%. $100k/$1 million = .1 or 10%.

Either metric is well regarded among dividend growth investors. The yield indicating what amount they’ll receive as a dividend and the payout reflecting the sustainability of that dividend. Specifically, investors may pay close attention to the payout ratio for signs of trouble to a payment or for confirmation future dividend hikes are warranted.

Both metrics offer investors insight but yield is probably the most touted metric across the investment landscape. From Youtube to the bus stop you won’t find anyone unwilling to boast of their investment yield. Similar, I think to uncle Ned’s fishing stories!

Growth Prospects

If there were a lacking quality to dividend growth investing this is it. A quick search across the web will showcase what I mean. Differing investment camps have verbal death matches surrounding this topic.

On one side, dividend growth investors are quick to claim that what they lack in share price appreciation is accually returned in the form of dividends. And by re-investing those dividends the investment decision is sound. On the other, growth focused investors are equally as quick to showcase their Nvdia investment compared to the likes of Coca-Cola or similar.

Akin I believe, to the speed vs comfort argument. In my 20’s give me a corvette, no question. In my 40’s, no thanks, I’ll take the pickup truck every day of the week.

While that battle may rage on for a millennia, it isn’t uncommon for dividend growers to experience a sub-optimal share price return. Making it a key consideration for possible dividend growth investors. No and any decision but a necessary one.

I suppose there are more than a few success stories of investors having successfully navigated differing investment styles but that isn’t necessarily the norm. Should a mixed approach be preferred the benefits to dividend growth investing may ultimately be negated. However, any philosophy is more than fine, so long as it fits your personality and risk tolerance.

Diversification: Do I need it?

Well, yes and no is probably true. Dividend growth investors may find themselves under diversified at times as dividend growth investments occupy a relatively modest corner of the total market. With attention however this shouldn’t be a meaningful detraction. Any investor can surely build a portfolio that spans various segments or sectors.

That said, those with experience may find diversification to be a rather limiting factor. As one asset soars another sours, effectively neutralizing a portfolio. Those with the fortitude and foresight to avoid mistakes may find that under diversification could just be a catalyst to outsized success.

Whichever is decided should align well with the investors goals for the future and their portfolio. More conservative investors may seek to minimize volatility and increase diversification where more aggressive investors opt for less. The downside, if we want to view it this way, would be lesser diversified investors would need to stay abreast of changes and respond quickly.

Personally, I prefer an over diversified approach which you’ll see from my portfolio here.

Dividend Kings, Champions, Aristocrats, Contenders, & Achievers

In order from best of the best to up and coming;

• Dividend kings – Have increased their dividend payment for 50+ years.
• Dividend champions – Have increased their dividend payment for 25+ years.
• Dividend aristocrats – Have increased their dividend payment for 25+ years and are in the S&P 500.
• Dividend contenders – Have increased their dividend payment for between 10 – 25 years.
• Dividend achievers – Have increased their dividend payment for 10 years.

Each of these respective groups have increased their dividend each year for the number of years listed. Not an easy accomplishment given the financial turmoil we’ve all experienced over the years. Nevertheless, these lists could serve as a nice starting point for investigating an investment opportunity.

Caution! – I would not view these lists as the be all end all. They completely neglect index funds, ETF’s, bonds, etc. and are instead only focused on the companies themselves. An easy oversight, and one that I have also made.

Uncle Sam and The Tax Bill

No investment philosophy discussion would be complete without taxes. Dividend growth investing isn’t a preferred strategy if taxes are to be avoided. Every dividend can trigger a potential tax event and opposition to dividend growth as an investment method will be sure to remind you about taxes frequently.

Still, an investor would be well served having familiarized themselves with the various account types available today. More than a few receive favorable tax treatment and others, like a Roth IRA, eliminate tax concerns entirely. Here is a site listing many of the different investment account types or you may speak with an existing brokerage to determine their unique account offerings.

For me, the approach to avoiding an outsized tax bill was to simply hold dividend payers in a Roth IRA account. An easy fix to otherwise uncomfortable trait of this investment style.

Downsides to Dividend Growth Investing

The downside to dividend growth investing will differ depending on where you look or who you ask. However, as I discussed in my dividend investing 101 article and as I’ve mentioned here, the greatest downside is subpar growth. Though the evidence suggesting this generally fails to properly evaluate the re-investment of dividends it must be considered before wading out into dividend growth waters.

Another area dividend growth investors must always be cognizant of is the health and stability of the dividend being paid. Companies can easily mis-step in one way or another or the market may change, rendering a product or service less desirable. In such a scenario, the dividend payment may become a question mark. For those seeking a stable portfolio with an actual growing dividend, a dividend cut is never welcome.

Under diversification is also a downside to the dividend growth investment method. Those seeking this style of investment would do well to account for this in the research and planning phase of an investment. With consideration given, not only to the current yield or to the dividend growth but also to the construction of an entire portfolio. A portfolio of assets able to withstand every market cycle, regardless the dividend growth, may be an under appreciated target.

In all, investing means an acceptance of risk and that risk can take many forms. Much of which is focused on choosing to invest in one place over another. The opportunity cost of dividend growth investing couldn’t truly be quantified but if history is any indication, those concerns may be unwarranted as cashflow is generated and re-investment occurs.

Dividend Cut, oh my!

The greatest pitfall to dividend growth investing, in my opinion, occurs when an asset unexpectedly lowers a dividend payment. Further, it isn’t uncommon for a struggling company to minimize their dividend upwards to 50% or more. Adding perspective, consider a company with a 3.5% dividend yield. Suppose troubled times strike and the payout ratio rises to 90%. In this scenario, the company is paying the majority of their earnings out as dividends. In this situation, the company will likely choose to eliminate some portion of their dividend. Hardly a recipe for a successful dividend GROWTH portfolio.

Consider also the negative sentiment you’ll experience having built a position up over years of dividend re-investment. Basically meaning, you wake up one day to find an income stream has been cut in half. An expected $10,000 dollar dividend payment turning to $5,000 could mean some very difficult life choices.

All together, while dividend cuts do happen they are possible to avoid. Careful planning around desired assets and an awareness of portfolio holdings would stave off most unwelcome surprises.

Final Thoughts

Dividend growth investing has proven time and again to be an investment philosophy worthy of consideration. The potential for a steady stream of growing passive income will likely always be a desirable characteristic amongst investors. Though, as with any investment approach, it’s imperative that an investor recognize potential hurdles and seek to avoid or remove them entirely.

Dividend growers may have historically outperformed the market but there is never a guarantee. A method I’ve personally adopted, is balanced mix of the different investing styles. I prefer an aggregation of growth investing, dividend investing, income investing, dividend growth investing, and value investing. I am however not an advocate of boundlessly moving from one style to another.

In all, dividend growth investing is hyper focused on a growing dividend. With mindfulness toward risk, investment objectives, and time horizons investors may equip themselves with a stable, recurring, and ever growing income stream. More than capable of lasting a lifetime.

Until next time.

God bless,

Jeff

<p>The post Dividend Growth Investing 101: Build Wealth Through Consistent Income first appeared on UQinvest.com.</p>

Let’s turn our attention to growth investing. Every investor has day dreams of one day sailing off into the sunset riding comfortably into their golden years on those Microsoft shares they picked up in 1982. I’m no different and likely neither are you. We invest with the hope one day our diligence will pay off. In this post I’m going to uncover a few nooks and cranny’s that should be considered as you start eye-balling that new boat.

It’s my opinion, growth investing should be the very foundation with which an investment plan is built. Assuming of course you have time still to invest. If you’re already nearing retirement, it certainly isn’t ever too late but their may be additional considerations beforehand. Afterall, investing long term at 63 only to encounter a 2008 style crisis might not be the most enjoyable experience.

In any case, let’s walk through the concepts underpinning successfully investing for growth.

As always, this post isn’t a recommendation but merely a jumping off point as you navigate the always uncertain investment waters.

Post Contents

• What is Growth Investing?
• Revenue Growth
• Growth Investing Rewards
• Quintessential Growth Stocks
• Modern Growth Stocks
• Products & Services
• Income Potential: Zero
• Evaluation of Growth Stocks & The Next “BIG” Thing
• Downside to Growth Investing
• FOMO & Overvaluation
• Volatility Expected

What is Growth Investing?

Of the great many investment philosophies in existence, I would argue growth investing should be near the top of that list. Behind only those ideals necessary to meet a specific investment goal. That said, on a foundational level growth investing can be simplified down to, an investment into a company experiencing rapid growth. Likewise, rapid share price appreciation.

Every company in existence is or once was a “growth” prospect. New companies bring new ideas, better products & services, or disruptive technologies that impact the fabric of our current economic engine. While they may struggle initially with profitability, a key lynch pin to investing for growth is in these companies ability to re-invest and, you guessed it, grow!

Revenue Growth

The lifeline to a growing business is revenue generation. Profitability is indeed a fundamental criteria over the long term but many growth companies forgo short term profitability on their quest for expansion. In doing so, they roll every available dollar, including debt, back into the company as they attempt to scale.

A company experiencing rapid revenue growth is also gaining market share as their products or services gain popularity among consumers. Consider Netflix as it rose in popularity, taking market share from Blockbuster and virtually every other media outlet. Netflix was a growth machine, churning out revenue and subscribers by the millions. A $1,000 dollar investment in Netflix 20 years ago would be a staggering $206,000 dollars today. A classic example of a growth company but also a template for the type of revenue growth investors should seek for future growth investments.

Quality companies offering products or solutions to consumers will inevitably grow. By identifying above average revenue growth an investor can maintain confidence that consumers enjoy their offering. However, revenue growth alone isn’t enough. The company would have to execute a violent and often volatile growth plan as they attempt in-roads in existing markets. Or I suppose, make roads to new markets.

In any case, an effective growth plan and an unwavering management team combined with explosive revenue growth is more than worth consideration. That said, its worth mentioning that the investment landscape is awash with stories of the next great growth company. Every one of which has done an excellent job of marketing their story to the general public as the next Netflix of their respective industry.

Growth Investing Rewards

The rewards for growth investors are plain to see. Investing in growth companies has the ability to 10x, 20x, 0r even much much more as we saw was the case with Netflix. The financial reward from identifying these market unicorns is truly unbelievable. However, I’ve heard it said that the probability of winning the lottery is higher than finding, investing, and holding onto shares of such a company.

Outsized returns, rapid corporate growth, and a trajectory nearing the stratosphere are all key identifiers to a successful growth investment. Identifying and investing early could be the difference in setting sail into the sunset or just sitting on the dock. Either is probably great but catch the next Netflix and you’ll see what I mean.

Quintessential Growth Stocks

While it isn’t easy to find the next great growth investment there are a few characteristics these companies share. They may serve as useful tools in an investors attempt at finding that next great investment.

• Operate in a new or innovative market.
• Products or services that solve real problems.
• Extraordinary revenue growth.
• Outsized spending on research, development, or marketing.

I would encourage you to notice that the most successful companies aren’t built on greed, which is ever present in corporations today. No, success is built on progress. Companies experiencing these characteristics are not by accident, collectively they’ve decided this is the way. They consistently seek and scale new avenues into the market. Bringing with them the products and services we may not even yet know we need.

Before we move on, I thought it would be great to see a few of the most notable growth stocks of all time and what a $1,000 dollar investment 20 years ago might look like today. We’ve already considered Netflix but there are plenty of other success stories. Additionally, here is a cool calculator that let’s you examine these companies based on another amount or year.

1. Netflix – $206,000
2. Microsoft – $23,413
3. Nvidia – $745,177
4. Apple – $353,070
5. Amazon – $89,630

Almost surprising to see how low Microsoft is on that list. I guess they experienced the bulk of their growth during the personal PC boom of the 90’s. Still, any of these investments are way above average and finding just one is likely to alter your financial future immeasurably.

Modern Growth Stocks

I’d be remiss if I moved on without discussing the current investing landscape. While the last section may be fun to look at an consider what life would be like had we corralled one of these whales. The reality is finding the next Amazon is not an easy task. Right now, there are teams of people scouring every conceivable data point(or having the latest ChatGPT iteration do it) to find that next big mover.

In reality, these companies themselves have grown so large they’re now more like ETF’s than individual companies. Consider Microsoft, if they were so inclined could easily break up their company in to many smaller companies. They might have a company for cloud services, another for gaming, still another for software or hardware and the list goes on. In every one of those instances, they’re still likely the leader in that respective field and if they aren’t, they have the resources to “bully” or buyout those that are.

Which means we must look at the investing picture a little differently. I’m not saying other currently unknown companies won’t one day achieve this level of success, I’m simply saying these companies are large. Meaning, they, at least currently, have an outsized level of control in the market. Not only do they command the most investment dollars for their shares, they also command the physical market with their products or services.

In that light, following these behemoths and there up and coming projects may just be akin to growth investing, nested in a former growth stock. As an example, one may consider Nvidia. A company that was founded over 30 years ago and largely rose to prominence in the 90’s & early 2000’s. Yet, look at the level of growth they’ve experienced in the last 10 years, well after they’re growth years. It’s certainly food for thought and more than worth a look if you’re considering a growth investment.

Products & Services

If revenue is the lifeblood of a growth stock then their products or services are the heartbeat. One doesn’t happen without the other. Make a world changing product and the revenue will come, this much I’m sure. Still, it isn’t uncommon for a growth company to try and repurpose old ideas as the latest wave of change. Further complicating an investors chances at finding a terrific growth asset.

As it relates to the tangible offerings of a company, it’s important to identify a few common characterisics.

1. Does the market have a need?
2. How far reaching is that need?
3. Does the product or service differ meaningfully from currently available offers?
4. Is the product or service priced appropriately for significant growth?

Should the product or service actually be useful on a large scale would eliminate thousands of possible companies immediately. As most, just don’t offer anything groundbreaking or that can’t be acquired elsewhere. Further, if the product or service provides no use to other regions then they could also be eliminated from consideration. Lastly, if the product or service isn’t priced appropriately that barrier may prove too high a bar for the product to ever grow it’s wings.

In all, these are just a few more considerations a potential investor must weigh carefully before committing their relatively limited investment capital.

Income Potential: Zero

As you may have surmised from my Dividend Investing 101 or my Income Investing 101 posts, I’m encouraged by a consistent income stream from my investments. However, growth investing should absolutely not be offering much, if ever any, dividends. As investors, we should probably demand this from that portion of our portfolio. We want our growth assets to do what they’re intended to do, grow. Returning any of that capital to us as shareholders in the form of dividends would be counter-intuitive.

Moreover, many companies elect to buyback shares in lieu of a paying a dividend. I also believe this would be a detraction from a solid growth company. Generally speaking, when a company cannot identify any better use for their capital, they return it to shareholders. Typically a positive aspect of investing. However, growth focused companies should be scaling up at every turn, increasing outflow so that inflow follows. Any less than growth would categorize the asset in some other way.

Evaluation of Growth Stocks & the Next “BIG” Thing

Far and away the most difficult aspect to growth investing would be finding what the world believes is a ground shaking new product. In our own lives that new iphone may be revolutionary but would they agree in Japan or Africa. Difficult to know. In hindsight, it’s clear to see that yes the iphone was a revolutionary product when it first arrived in 2008. Prior to that, we had never experienced touch screen technology or the convenience of having a computer in our palm.

For me, rather than attempting to identify the next life changing device I prefer to hold a basket of ETF’s that will more than likely hold the next “BIG” thing. I wouldn’t achieve the life changing rewards inherent to the biggest winners but my portfolio would grow. A respectable trade off between the work of finding that unicorn and capitalizing on it’s growth.

In either scenario, an investor would be rewarded but for those few but shrewd among us. Finding that next product or service offering the world just can’t live without would certainly reap an outsized reward.

To evaluate a growth stock, probably the most logical starting point would be to identify those aspects that would eliminate an investment from consideration. Truly not an exhaustive, these questions may curate a respectable list of potential investment opportunities.

As a side note – much of the minutia can be whittled away quickly using an investment screener similar to the one found at Finviz.com. It isn’t a replacement for due diligence but does lighten the burden in our busy lives.

1. Do we need the product or service?
2. Does that need address a large enough market?
3. Are there any competitive advantages to this product over another?
4. Do the financial statements align with what we know of previous growth companies?
5. Is the company increasing market share and revenue?

Once a list of possibilities is concluded an investor may wish to move on in an examination of qualitative factors relating to the company or it’s products. Possibly, culture, management, intellectual property, or business strategy to name a few. Any of which would prove valuable to an investor and the company alike.

Downside to Growth Investing

Few if any aspects of investing are as challenging as finding that next great stock. Income investing, dividend growth investing, or even day trading can return rewards quickly. To succeed in growth investing is similar to throwing darts at a dartboard 100 yards away. The board is barely visible and wind, rain, or even birds may interrupt the darts trajectory. Making growth focused investments incredibly risky. They occupy valuable capital that could be utilized elsewhere for most of a lifetime.

Next, is the all too common practice of lofty valuations. Investor logic has largely left the building on this front as companies like Nvidia race ever higher, regardless the fundamentals that traditionally chart an assets course. It isn’t uncommon for an investor to hear the hype and invest just before the fall. There is never a guarantee that a terrific growth story, even such as Nvidia, won’t begin to stall.

In the end, my opinion is, the greatest detriment to growth focused investors remains the opportunity cost of chasing these darlings. If you’re seeking eye-watering returns then you’ll have to stay committed even as the world falls to pieces.

The cost of committing to an asset for 10, 20, 30 years or longer means never being able to put that money to work elsewhere. Especially considering that most companies don’t ultimately become Amazon or Netflix. No, just the opposite is true as most become 3D Systems Corp. (DDD) A company I believed was the next big growth stock as 3D printers entered the mainstream. Goes without saying, I was wrong.

FOMO & Overvaluation

FOMO, or fear of missing out isn’t a new phenomenon but rather a new acronym for us as humans. A popular anecdote amongst investors is the tulip mania bubble that occurred during the 1600’s. Where speculation or FOMO, drove the value of tulip bulbs to an extreme valuation. As you can see, where any market exists, humans wrestle with the emotion of missing out. In truth and more often than not, by the time we learn about the value of a “tulip bulb” the market is nearing it’s peak. Making FOMO a pitfall all investors must be on the lookout for.

The next step in FOMO is the dramatic price increase, often an overvaluation of the asset in question. In the above example, tulip bulbs are said to have reached a valuation 5 times an average person’s salary. To translate that, the average annual salary in the US today is $59,000. Resulting in the price of a tulip bulb nearing $300,000!

Overvaluation has become a truly concerning aspect of the modern stock market. With many assets trading well outside their inherent values. Consider the magnificent 7 (Mag 7) of Google, Apple, Amazon, Meta, Nvidia, and Tesla. Combined, they blanket the indices designed to track the state of the market. Making it even more difficult for the average investor to ascertain a market pulse. With such a determination being critical for a growth investor determining when to invest.

Volatility Expected

As you’ve probably gleaned from most of this article growth investing comes with an outsized measure of volatility. Volatility as it relates to growth can be summed up in this way, you may well make and lose a fortune many times over. All but a comfortable ride and one that I’ve experienced the loss side of more times than I’ll ever admit. Still, an investor traveling through these waters needs to know what they’re in for.

As these new companies push the boundaries of societal norms, they will inevitably experience some push back. Often, nay always resulting in volatility to the share price. Failing to stay the course is similar to my investment of Apple back in 2014. After making a few thousand dollars I moved on thinking the price was overvalued. Temporarily I was proved right as the price declined nearly 20% shortly after. However, as I quickly learned that was expected volatility and an investment that would have paid for a house as of today’s valuation.

Final Thoughts

At the end of the day, determining whether growth investing is the right fit for you depends on your goals and risk tolerances. Investing in this space takes, in my opinion, remarkable courage and foresight. The likes of which most don’t possess, including myself. For this reason, I’ve chosen to invest in several different ETF’s that either hold or will eventually hold these incredible growth stories. I may indeed sacrifice stratosphere level returns but I also alleviate extreme volatility from my portfolio which isn’t to be quickly discounted.

At it’s foundation, growth investing is about finding, investing, and holding those truly transformative companies BEFORE everyone knows who they are. With a watchful eye and an enjoyment for research and study finding a successful candidate is achievable. Still, it’s important to also be on the look out for detractors such as FOMO, overvaluation, or meaningless hype. People and companies alike have an uncanny ability to oversell and under deliver on the promises they make.

Until next time.

God bless,

Jeff

<p>The post Mastering Growth Investing: High-Potential Investment Selection first appeared on UQinvest.com.</p>