Why Should You Invest in ETFs?

See the 5 Easy Steps to Start Investing post to learn more about getting started.

ETFs (exchange-traded fund) are baskets of stocks within a type or “theme.” For example, the ETF “IVV” or “iShares Core S&P 500” top 10 holdings are companies such as Apple, Amazon, JP Morgan, and ExxonMobil. The common denomination is that they are all part of the S&P 500. Basically instead of choosing 1 stock, you are choosing 1 basket of stocks that help quickly diversify for you instead of relying on 1 stock at a time and having to figure out which stocks to buy. A fund manager is actively managing the ETF for you.

So today, I wanted to go through an analysis of all the iShares ETF. You can easily download basic data for all 347 ETFs that iShares manages and analyze their portfolio to prove why investing in ETFs work.

Key Findings:

  • 23/347 (6.6%) of ETFs have seen an overall negative return since inception. Only 4 of the ETFs are U.S. based ETFs (REM – iShares Mortgage Real Estate Capped ETF, IYZ – iShares U.S. Telecommunications ETF, IEZ – iShares U.S. Oil Equipment & Services ETF, and ITB – iShares U.S. Home Construction ETF). The remaining 19 have been in global developed or emerging markets.
  • 33/347 (9.5%) of ETFs are less than $10 million in net assets. Altogether they have averaged a 11% return since inception; however, do some research into these before investing.
  • 4/347 (1.2%) of ETFs have had a negative return YTD (1/1/17-11/30/17), which based on the names below, shouldn’t be much of a surprise if you’ve listened to the news every once in a while.
    Ticker Name Net Assets YTD Return (%)
    IYE iShares U.S. Energy ETF 1,137,061,390.16 -1.71
    IYZ iShares U.S. Telecommunications ETF 374,870,149.06 -11.21
    IEZ iShares U.S. Oil Equipment & Services ETF 237,126,197.61 -18.13
    QAT iShares MSCI Qatar Capped ETF 55,402,078.34 -14.41
  • The overall average return YTD (1/1/17-11/30/17) for iShares is about 17.8%. If you had invested in all 347 ETFs with equal amounts (assuming $1000 in each one for a total of $347,000), you account would reflect $408,766 or $61,766 return on investment (and this doesn’t even include the dividends associated with some ETFs). Not bad at all for doing absolutely nothing in 2017.

Capture

Again, keep your portfolio diversified and above, it shows where the major growth is happening. For the developed world, health care, industrials, small cap, and technology are at least a 10% annual growth rate. In the emerging markets, stick to large to mid-sized cap for at least a 8% return.

Basically, you can see that while there is risk involved with investing, the overall returns outweighs the negative returns. There are only 23 ETFs or 6.6% of the ETFs have had negative returns since inception, but that doesn’t mean that on a yearly basis they have always had a negative return. In fact, REM (iShares Mortgage Real Estate Capped ETF), who had an overall -2.49% return since inception, had a great 2017 and it brought in 18.51% return YTD (1/1/17-11/30/17) meaning if you invested $1000 in REM starting 1/1/17 and withdrew completely on 11/30/17, you would withdraw $1,185, not see 2.49% less of you $1000.

Obviously this means that you timed the market, but even the long-term shows good outcomes. Going back to REM (iShares Mortgage Real Estate Capped ETF), the inception date was 5/1/2007. Well, we all know what happened to the real estate market in 2008, but if you invested started 2009 instead, it’s been a positive return overall. Also, these are rare events that happen once or twice in a lifetime, which means that it should not discourage you from investing.

In the chart below, you can see pretty much the entire ETF portfolio has positive returns (last 3 ETFs do not have data).

ROI since Inception

I encourage you to download the spreadsheet and see if there is anything interesting that stands out to you. I truly believe 2018 will be another great year especially with the corporate tax cuts that will help companies do even better.

Bottom Line: Do research will only help you make better decisions, but overall you should see some sort of return on your investments even if there was a Great Recession. Make sure you diversify your portfolio and you’ll be fine.

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