5 step checklist to pick solid ETFs for your portfolio

Brian Orlando · 2m · transcribed 8d ago

Section Insights

# 0:00

Choosing the Right ETF

How should one choose an ETF?

Many people choose ETFs based on superficial factors like packaging and hype. A more effective method involves a five-step checklist to evaluate ETFs thoroughly.

Avoid choosing ETFs based on packaging or hype.
Use a structured checklist for evaluation.
Look beyond the brand to understand the fund's details.

# 0:29

Evaluating ETF Costs

What are the cost considerations when selecting an ETF?

The cost of an ETF is crucial; a good rule of thumb is to aim for fees under 0.25%. Higher fees require higher quality to justify the expense.

Aim for ETF fees under 0.25% for good value.
Higher fees necessitate higher quality investments.
Compare the cost of ETFs to understand their value.

# 0:58

Understanding Diversification and Risk

Why is diversification important in ETF selection?

Diversification is key; higher fees should correspond with greater diversification. Concentrated ETFs carry higher risks and may not justify their costs.

Higher fees should provide real diversification.
Concentrated ETFs can be riskier and less beneficial.
Evaluate the total return over time, not just yield.

# 1:27

Long-Term Growth vs. Income

What are the differences between growth and income ETFs?

Growth ETFs like VUN are better for long-term investment, while income-focused ETFs like ZWC serve different purposes. Understanding these differences is crucial for investment strategy.

Growth ETFs typically outperform income-focused ETFs over time.
Yield does not equate to total return.
Choose ETFs based on long-term goals and investment strategy.

# 1:56

Personalizing ETF Choices

How should personal circumstances influence ETF selection?

Personal finance is subjective; younger investors may prefer growth ETFs, while older investors may need income-focused options. A five-step checklist can help align choices with individual financial goals.

Personal circumstances should guide ETF selection.
Younger investors may prioritize growth, while older investors may seek income.
Use a checklist to ensure investment choices align with personal goals.

Transcript

0:00 Many people pick an ETF the same way they pick a protein bar. It's packaging, hype, good vibes. Let me show you how to actually pick one with a little bit of work so you won't get tricked. I'm Brian, CPA over 15 years in finance. Vanguard is a gold standard on many lowcost index ETFs. Isares has a lot of great options, too. There's many other good funds, but even with the big brands, you still have to look under the hood, read the label to know what you're getting. Many will ask, is this a good ETF? Here is a literal five-step checklist. I run it every single time.

0:27 Takes about 3 minutes. So VUN for instance.16% that's 16 bucks per year on every $10,000 invested. Excellent. Now look at ZWC 72% at $72 per year 4 and a half times more expensive. The rule is under 0.25% is very good. Over.5 you know it has to be very very high quality at that point for me to invest. The UN holds 3,700 companies across the entire US market. Small, mid and large cap companies. Real diversification. ZWC on the other hand holds six banks. much more concentrated, higher risk. You're paying a higher fee for less diversification. If you're paying a fee, you better be getting real diversification. Otherwise, why not just invest in single stocks yourself? VUN pays about 1.3% clean growth, mostly capital gains. ZWC shows 7% yield. If you only look at the yield, it looks amazing. But a lot of that is actually return of capital. So, it's your own money getting mailed back to you. A little bit more nuance than that. It's the net asset value returning to you.

1:24 But if you look at total return over 10, 20, 30 years, lowcost broad ETFs usually win by a large margin. Yield is not the same thing as total return, especially with these covered call type ETFs. Quick check. So, both have over $und00 million, so they're safe and liquid, but VUN tracks its index almost perfectly. ZWC legs the banks by about 2% a year. That's the covered call gap on your upside. Over decades, that gap can grow to tens of thousands of dollars. Here's the truth. VUN is an A+ core ETF for long-term growth and buy and hold. ZWC is built as an income product. It's higher yield, lower growth. If you know that going in, it's fine. I'm not trying to rip on this this ticker here. It's just dangerous when people think they're buying a somewhat similar product.

2:06 Personal finance is personal. For a 35-year-old, let's say, trying to grow wealth, VUN makes a lot more sense. for a 70-year-old who needs monthly income, maybe ZWC fits her portfolio and risk profile based on other shares. Point is, you can run this five-step checklist on any ETF in just a couple of minutes and instantly see if the story matches the math.

Summary

Brian, a CPA with over 15 years in finance, emphasizes the importance of a systematic approach to selecting ETFs, rather than relying on superficial factors like packaging or hype. He presents a five-step checklist to evaluate ETFs, highlighting the significance of understanding fees, diversification, and total returns.

- Many investors choose ETFs based on appearance and hype rather than thorough analysis.
- Vanguard and iShares are recommended for low-cost index ETFs.
- A five-step checklist can help evaluate ETFs in about three minutes.
- Fees should ideally be under 0.25%; over 0.5% requires high-quality justification.
- VUN offers broad diversification across 3,700 companies, while ZWC is concentrated in six banks.
- Yield is not equivalent to total return; understanding this distinction is crucial.
- Long-term performance favors low-cost broad ETFs like VUN over high-yield options like ZWC.
- Personal finance strategies should align with individual goals, such as growth for younger investors versus income for retirees.