24/7 Wall St. Insights

• Exchange-traded funds offer a stock market type platform to invest in various indexes.
• VTI is an ETF that tracks an overall stock market index from the Center for Research in Security Prices.
• JEPI is an example of an ETF for investing in the S&P 500 Total Return Index with an added twist.
• VUG is an ETF focused on top growth stocks from Vanguard’s own growth stocks index.
• For investors seeking dividends, click here for a free report on two high-dividend stocks.

Since 2016, the Dow Jones Industrial Average has increased significantly, from around 18,000 to over 34,000 at the time of this writing. This has caused consternation among many would-be investors on the sidelines over the thought that they missed the boat. At current levels, there is a sizable contingent who think the market is prime for another 2008 meltdown. Another group is more optimistic but is unsure how much is left in the gas tank to go higher.

It is not presumptuous to guess that a great majority of investors would be overjoyed with nearly doubling their money if they had invested in the DJIA index itself. Exchange Traded Funds (ETFs) and Mutual Funds both provide the means to invest in an index of one’s choice out of the hundreds available. The best part is that one can, for the most part, invest much less initial principal in them than other investments would demand.

ETFs vs. Mutual Funds – McDonald’s or Burger King?

For close to 60 years, fast food aficionados have debated over their preference for McDonald’s vs. Burger King. Objectively, both chains serve variations on hamburgers, french fries, soft drinks, and assorted sides and desserts. Operationally, both establishments use comparable ordering systems and assembly line practices. The differences are minimal and largely preferential, as opposed to technically superior. ETFs vs. Mutual Funds are much the same.

Exchange Traded Funds and Mutual Funds have a number of likenesses. Here are the primary ones:

• Pools of individual stocks, bonds, derivatives contracts, or other securities that represent the sector of interest comprise the portfolios of both ETFs and Mutual Funds.
• Diversification and risk mitigation properties through a prorated interest in the total portfolio’s assets are offered by both ETFs and Mutual Funds.
• Closed-end Mutual Funds have a fixed number of shares and trade on NYSE or NASDAQ at a market bid/ask price, the same as ETFs.

Their differences are more distinct; the following apply to Open-Ended Mutual Funds:

• Most mutual funds have a minimum investment amount between $500 and $5,000. One can buy as little as a single ETF share.
• An ETF share can track an equivalent bond at a fraction of the bond’s $1,000 par value.
• ETFs trade at a live bid/ask market price, which can vary within seconds. Mutual Funds trade at the same Net Asset Value price for the entire day.
• Since they are frequently pegged to a benchmark index, most ETFs are passively managed. Mutual Funds are usually actively managed, which correspondingly hikes load fees.
• Mutual Funds have varying loads and early redemption fees, which are factored into their costs. Lower ETF costs can be a premium to NAV, broker commissions, and market maker bid/ask spreads.
• Mutual Funds are taxed differently (usually higher) than ETFs with regard to capital gains.

Vanguard Total Stock Market ETF

ETF: Vanguard Total Stock Market ETF (NYSE: VTI)

Yield: Approximately 1.5%

Shares for $1,000: Approximately 4.55

Fees: 0.03% expense ratio

With over $300 billion in assets under management (AUM), the Vanguard Total Stock Market ETF is designed to track and replicate the CRSP US Total Market Index. This index includes nearly 4,000 different companies, including mega, large, mid, small, and micro-cap stocks. Nearly 100% of the US equities market is represented.

Sector-wise, the Vanguard Total Stock Market ETF portfolio’s top five sectors are:

• Technology: 28%
• Consumer Discretionary: 16%
• Health Care: 13%
• Financials: 11%
• Industrials: 10%

The 10 largest positions in the Vanguard Total Stock Market ETF portfolio are:

• Apple Inc. (NASDAQ: AAPL): 6.2%
• Microsoft Corp. (NASDAQ: MSFT): 5.7%
• Amazon.com Inc. (NASDAQ: AMZN): 3.0%
• Nvidia Corp. (NASDAQ: NVDA): 2.5%
• Alphabet Inc. Class A (NASDAQ: GOOGL): 1.7%
• Tesla Inc. (NASDAQ: TSLA): 1.5%
• Meta Platforms Inc. (NASDAQ: META): 1.4%
• Berkshire Hathaway Inc. Class B (NYSE: BRK.B): 1.3%
• UnitedHealth Group Inc. (NYSE: UNH): 1.0%
• Johnson & Johnson (NYSE: JNJ): 0.9%

Ten years ago, the Vanguard Total Stock Market ETF was around $83. As of the time of this writing, it is approximately $220, representing a gain of over 165%.

JP Morgan Equity Premium Income ETF

ETF: JP Morgan Equity Premium Income ETF (NYSE: JEPI)

Yield: Approximately 9%

Shares for $1,000: Approximately 18.52

Fees: 0.35% expense ratio

One of the specialties of 24/7 Wall Street is its extensive database of dividend stocks. It has published a voluminous number of articles highlighting different dividend stocks over the past decade. Income-oriented fund investors will want to take a closer look at income-focused ETFs, which often use strategies to enhance returns that are unavailable to bond ETFs or other funds.

The JP Morgan Equity Premium Income ETF is a fund that cherry-picks solidly reliable dividend-paying stocks from the S&P 500 Index. Attention is paid to those stocks that aren’t overly volatile. It then uses a portion of its funds to sell out-of-the-money call options against the stocks. The strategy is predicated on the stocks’ low volatilities, with the majority of the options expiring worthless. Thus, extra income is derived from the portfolio stocks beyond their intrinsic appreciation over time. The premiums earned from selling the options mathematically reduce the cost basis of each stock accordingly.

The top 10 largest holdings in the JP Morgan Equity Premium Income ETF are:

• AbbVie Inc. (NYSE: ABBV): 1.8%
• Bristol-Myers Squibb Co. (NYSE: BMY): 1.7%
• The Hershey Co. (NYSE: HSY): 1.7%
• Progressive Corp. (NYSE: PGR): 1.6%
• PepsiCo Inc. (NASDAQ: PEP): 1.6%
• Marsh & McLennan Companies Inc. (NYSE: MMC): 1.5%
• CME Group Inc. (NASDAQ: CME): 1.5%
• The Coca-Cola Co. (NYSE: KO): 1.5%
• Merck & Co. Inc. (NYSE: MRK): 1.5%
• Visa Inc. (NYSE: V): 1.5%

JP Morgan Equity Premium Income ETF has over $25 billion in AUM invested across approximately 100 different stocks. The fund aims to deliver attractive yields with lower volatility than the overall market.

Vanguard Growth ETF

ETF: Vanguard Growth ETF (NYSE: VUG)

Yield: Approximately 0.6%

Shares for $1,000: Approximately 3.33

Fees: 0.04% expense ratio

If capital appreciation is the goal of a fund investor, the Vanguard Growth ETF is worth a look. Tracking the CRSP US Large Cap Growth Index, Vanguard Growth ETF contains the “Magnificent Seven” tech stocks that have been driving the S&P 500 to record levels.

The fund has averaged a return of around 15% per year over the past decade, which translates to a roughly 300% appreciation in total. Vanguard Growth ETF has over $100 billion in AUM, and its top 10 largest portfolio positions are:

• Apple Inc. (NASDAQ: AAPL): 13.1%
• Microsoft Corp. (NASDAQ: MSFT): 11.5%
• Amazon.com Inc. (NASDAQ: AMZN): 6.8%
• Nvidia Corp. (NASDAQ: NVDA): 5.2%
• Tesla Inc. (NASDAQ: TSLA): 3.5%
• Alphabet Inc. Class A (NASDAQ: GOOGL): 3.4%
• Meta Platforms Inc. (NASDAQ: META): 3.3%
• Alphabet Inc. Class C (NASDAQ: GOOG): 2.9%
• UnitedHealth Group Inc. (NYSE: UNH): 1.9%
• Visa Inc. (NYSE: V): 1.7%

The “Magnificent Seven” includes Apple, Microsoft, Amazon, Nvidia, Tesla, Alphabet, and Meta Platforms. As one can see by the breakdown of shares, the Magnificent Seven comprises a significant portion of the portfolio’s total assets.

ETFs come in a wide assortment of index coverages, strategies, and sectors. While not requiring as much regular scrutiny as an individual stock portfolio, they should still be monitored for any news or market events that impact the overall market and may affect the ETFs that are chosen.

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