Video we're going to talk about ETF Secrets to ETFs you've probably never heard about before and one dangerous S P 500 tracking ATF That could actually be costing you a lot more money even though you might be thinking you're saving money folks I'm meet Kevin and in this video I am going to teach you everything I know about ETS Specifically the three things that we just outlined I'm really excited to bring this to you because not only am I a licensed financial advisor, but I also run an actively managed ETF Keep in mind this video is not to talk about my own products I'm not going to mention any of my own services in this video and this video is not personalized Financial Advice for you I Just want you to know that through the creation and through the processes of getting licensed and everything that I've done I have a little bit of insight into ETFs that might help you learn something about ETFs So first and foremost, something that we really have to get out of the way is sometimes when people hear 80 EF they don't actually understand what that is and that's totally okay. An ETF is basically just a fund that trades on the stock market. That's it. After all, it's called an exchange traded fund Now something that's worth noting about that is generally ETFs with often very very minor variations.

discounts or premiums Very, very rare that you have a large discount or premium on an ETF Usually they trade at what's known as net asset value or Nav Now Why is that important? Well, it's important? because basically, if an ETF invests in, let's say 100 different stocks and they started investing today, Let's just say today is uh, December 6th they started investing on December 6th into those hundred stocks. It doesn't really matter if that ETF which might be trading at Twenty dollars, It doesn't really matter if they have one million dollars of assets under management or all of a sudden some really rich hedge fund dude comes along and says, you know what, I'm putting a billion dollars into your ETF that ETF is still trading at probably roughly twenty dollars. The reason for that is it doesn't matter how much money flows into an ETF, the ETF trades at what the underlying value of the stocks is relative to when they listed. So for example, if tomorrow, those 100 stocks on 12-7 all 100 of those stocks average out to be worth 10 percent more than the value of the ETF should be trading at roughly 22 or 10 more.

It doesn't matter if there's a dollar, a million dollars, or a billion dollars in that ETF Roughly speaking, this is how an ETF should trade. Not based on how much money is flowing in, but rather based on the movement of the underlying stocks. This is very different from like a little small cap or micro cap stock that could get pump and dumped. Let's say you've got, you know, the uh, the X-com company.

Okay, and they're trading under ticker symbol X I'm just making this up and they have like a 50 million dollar market cap and they're like an over-the-counter stock and somebody wants to pump up this stock right? I'll give you an example of how somebody can pump this up with thinly traded stocks. You have some. Well, any stock has an order book, there's a buy, and then there's a sell order book And let's say that stock is right now trading uh with a 50 million dollar market cap and it's trading for 20 bucks. That's the current trading level right? And you have have nobody who wants to sell the stock at twenty dollars.

But you do have somebody over here that's willing to sell 500 shares at twenty one dollars. Someone here that's willing to sell 1500 shares at twenty five dollars. and then some bad actor wants to pump this stock right? So maybe they put in a market order on this thinly traded stock for 1500 shares at Market. The danger of a market order on thinly traded stocks is you could run up the order book.

Now all of a sudden you have a 1500 buy order. Well, you're gonna execute 500 at 21 and then you'll take a thousand of these over here at 25.. the market now sees the last traded stocks were at twenty five dollars. All of a sudden, the stock price is no longer twenty dollars.

It shoots up to the last traded price of 25. And all of a sudden it makes it look like this stock just pumped up 25 because it's a thinly traded small cap. ETFs Don't work that way. It doesn't matter how thinly traded it is, you don't sort of pump and dump an ETF because you can't because it's based on the movement of the underlying value of the stocks.

That's really important to know about ETFs versus stocks. Now there are two types of ETFs. There's actively managed and passively managed. Generally the most common types of ETFs that we see are passively managed.

ETFs. So two really big passive uh ETFs are ETFs that like to track the S P 500 which basically just takes the largest 500 companies based on market cap in the US economy and throws them together in a basket. Apple has the largest market cap. so guess what? Apple has the largest waiting and is the number one position in the S P 500.

Very simple passive. ETFs Uh, follow indices and indices are rules based. They're known as passive because nobody's actually changing the allocation. Nobody's going into the S P 500 saying.

You know what? Today, we don't like Apple anymore, so we're going to reduce the allocation. It's just rules based. What are the largest companies? All right? those are the 500 that we're sticking into. the S P 500.

Uh, what is the NASDAQ do? Well, it takes the largest tech companies essentially. And when we look at the NASDAQ 100, we take the largest 100 non-financial technology companies. And there are ETFs that track these because you can't invest directly into an index because an index is just a basket of stocks. It's just sort of a spreadsheet that we put together and go, hey, what's the value of all these stocks added up? you know, divided by some kind of rule And there we go.

That's what the value of the S P 500 is. Or the NASDAQ whatever. But there are ETFs that track the. for example, Vo tracks the S P 500 passively.

They charge what's known as three basis points. which means that for every one thousand dollars you invest with them, it only costs you 30 cents per year approximately to invest into the Vo fund. This is because it's passive. The fees are usually a lot lower if you want to invest in NASDAQ 100.

Most people invest in QQQ. Here they charge you 20 basis points. Which means it costs you about two dollars per year to invest a thousand dollars. One of the ETFs though, that you can invest in that removes some of the expense of QQQ but does basically the same thing and it's one of the two.

ETFs I Want to reveal here is actually QQQ M. Yeah, get ready to be mind blown. The fee for QQQ is 20 basis points. The fee for Qqqm is 15 basis points.

So if you're a NASDAQ 100 investor, you should hold zero QQQ and you should only hold QQQ m. In theory, and the reason I say that is because I can't give you personalized Financial advice. But if you look at the difference between these two, you'll see that they're basically is no difference. So you might ask yourself, well Kevin Come on man, come on.

Why the hell then do they have two different funds? That's so stupid? No, it's actually quite brilliant. The reason they have two different funds that do basically the same thing is because with Qqqm they could appeal to people who are more fee sensitive to. For QQQ they could charge a higher fee for people who are just interested in what's most popular. So in other words, why would you give up the extra five basis points if you don't have to? If you, if somebody wants to save some money, they can go to Qqqm and and they can still get the same exact exposure.

In fact, take a look at this. If you go to Finance.google.com and you compare QQQ to Qqqm, you see that they're tracking basically exactly the the same line. But folks, you have to be very careful being fee sensitive. See, there is a particular way that you can invest in the S P 500 and pay absolutely zero fees.

But I want you to be careful here. So when you look at the S P 500 you might think oh well, all S P 500 funds are created equally right? And then when you go to a company like Sofi, you'll realize that Sofa is actually pitching you the Sofi select 500 ETF And this is supposed to track the S P 500. they have a net expense ratio to you of zero. It's basically a lost leader for Sofi to try to get marketing out and to get business right.

And if we jump on over to Google Finance, you'll actually see that when you compare the Vanguard Voo S P 500 ETF to the actual S P 500, you can see that they track pretty closely. Uh, it actually looks like the S P 500 is doing slightly worse than Vo, but they track almost exactly. That's because tracking ETFs aren't perfect. But if you're thinking oh, I'm gonna save money by investing in Sfy because Sfy has so little tracking ability compared to the power of Voos tracking ability.

look at the Sfy. The Sfy actually underperforms by almost four percent. Even though it's supposed to track the S P 500, it's underperforming to the downside by four percent. And if you go to the last, let's say one month where everything should be green, it's also underperforming.

So in both directions it's underperforming. So there is a risk when you look at ETFs that to some degree you can get what you pay for. So in this case, if you're trying to save some fees, in my opinion, it it makes sense to consider Qqqm versus QQQ because they basically track the same. But it doesn't make sense to use Sfy versus Vo to save the three basis points because you're getting tracking performance that's actually not as good.

It's actually to your detriment in both directions. up and down. That is worse when it's down and worse when it's up. That's not great.

So this is a little bit of a lesson into passive. ETFs Now I'm going to reveal one more passive ETF But I Want to talk about one of the big benefits of ETFs that's often overlooked and it'd usually have to do with has to do with active fund managers. See, when you invest in an ETF and you say I'm going to invest in this one ETF Forever Let's say you're going to invest in Kathy Wood forever. The difference with an Active ETF is that their fees are usually higher in the case of Kathy Wood funds.

At the time of this recording, they're usually around 75 basis points, which is a whole lot more than three basis points. But the idea here is that it's way less than usually investing in an active manager through a hedge fund, which might take a two percent annual fee and then a 20 performance fee on top of that after some kind of minimum return, right? It's certainly a lot less than a 2 and 20 model, and it's certainly a lot less than investing into a mutual fund that might just take 1.5 percent or even one percent, right? So an ETF is actually a very inexpensive way of getting exposure to an active fund manager and the benefit of an active fund manager in theory, because it's not always necessarily a benefit, but the benefit in theory of an active fund manager is that an active fund manager can say, hey, we think conditions at let's say Coinbase, which used to be a five percent holding in our fund have deteriorated and we want to actually reduce that. And so we're going to change this to now a two percent position in Coin, and let's say a three percent position in Matterport. And if you find an active ETF fund manager who can make those decisions for you, then there could be really good advantages.

First of all, they could reduce your exposure to companies that maybe you're going bankrupt or companies that are at risk of Performing poorly an index-based ETF If it doesn't have rules around matrices of performance, then maybe that index ETF isn't going to protect you from some of these fluctuations. So for example, if some of the biggest Holdings in the NASDAQ 100 are companies that you think are going to perform poorly, then you wouldn't want exposure to those and you wouldn't want to invest in QQQ right? So if we type into Google NASDAQ 100 Holdings Remember, these are the largest tech companies that are non-financial The largest companies that you have there are going to be companies like Apple Microsoft Amazon Apple Tesla But then you go down a little bit further and you'll see Oh, we've got PayPal in there at 31. Well, maybe you absolutely hate PayPal and you really don't want exposure to that. Or you don't want exposure to Blizzard which is also in their Activision Blizzard right? Well, maybe you can align with an active fund manager that can choose companies that you're not worried about because your fund manager is repositioning Euphoria is repositioning the fund for you, right? And that's why they charge a higher fee.

Some active fund managers also incr include Macro Hedges which could be a way to sort of hedge some of your risk at a lower expense than usually what an active hedge fund manager would charge because again, ETFs are more competitive and their fees tend to be lower. So the neat thing about active fund managers is the following and this is generally true of like index funds as well or index chasing ETFs as well. But there's a really cool tax benefit and the tax benefit is the following. If you say you know what I'm going to hold Arc K forever.

Well, if one stock runs, let's say Roku's in here. and Roku 5xs? Well, you're I Mean those are huge gains that are under the umbrella of RK Well, an active fund manager can say we're going to go ahead and trade these massive gains in Roku and we're going to go ahead and just get rid of all of our Roku stock. and instead we're gonna buy Tesla Just as an example, by them making this basket exchange, as long as they manage it appropriately, by them making this basket exchange, they can actually make an exchange without passing on, potentially talk to your CPA about this capital gains to you because they're actually exchanging ETF units for other ETF units. in this case, Tesla from Roku units to Tesla And by doing this exchange, they're not actually buying or selling the shares, they're just exchanging them.

And because you hold the underlying ticker, which is uh, RK and you don't actually hold the underlying shares, you're not exposed potentially to those tax obligations. So if you find an active fund manager that you really believe in, you could potentially avoid capital gains while having your portfolio automatically rebalanced for you. Now that's really cool. And again, it's true of passive funds as well.

But active ones generally have more exposure to individual stocks that you could trade into and out of, which again, the fund manager does that for you. So those tax benefits are great. And if you hold an ETF forever and let's say you're 90 years old, right? And this is a way to never pay taxes, let's say you hold an ETF until you're 90 years old, And you know what you're like I'm 90 years old I've held RK for the last 70 years I Trust so much at RK and let's say you have 10 million dollars of capital gains. Well let's say uh, your you know today's December 6th let's say and you sold all of those 10 million dollars of gains.

We'd probably have to pay somewhere around 25 percent in taxes. You know you might owe two and a half million dollars to the government in taxes for long-term capital gains and whatever gains taxes your state charges. I'm just making an example. Well then let's say on 12 7 unfortunately you get hit by a bus and instead of you having sold on 12 6, you actually kept uh, that 10 million dollars of arcade gains that you had and you got hit by a bus unfortunately at 90 years old on 12-7 But then on 12 8 your son sells all your shares.

Well, your son could potentially get what's known as a stepped up tax basis and this is where the IRS comes in and says hey, sorry for your loss. We're just gonna say you earned those 10 million shares at a 10 million dollar cost basis and we're not going to charge you any of those taxes that's called a stepped up tax basis. Really, really cool. So the neat thing about that with an actively managed fund is you could live your entire life.

have somebody else rebalance your portfolio for you outside of a retirement account, and never pay taxes. potentially on that rebalancing. as long as they're managing the fund in the best possible way. That's a really cool, unique advantage of actively managed ETFs But I did promise a second ETF and the second ETF that I want to talk about is actually another passively managed ETFs or another passively managed ETF And it tracks the largest 100 companies based on how much free cash flow they have and I want to leave you with this ticker? It's called ticker symbol cows.

Ticker symbol. cows is actually positive year to date here in 2022. It is a a passively managed fund so its fees are lower I Think they're somewhere around 20 basis points or something like that, which is still again lower than what you're going going to see at an actively managed ETF but it's a rules-based ETF so some it has a lot of Health Care Holdings a lot of oil Holdings so you have to be careful and see like okay, well, is there a risk for those going forward but the cows ETF is really, really cool. It's a Pacer ETF and it tracks the U.S Cash Cow 100 ETF Again, it is the It screens the Russell 1000 for the top 100 companies based on free cash flow which is pretty cool so it gives you a little bit exposure to a a rules-based ETF that not a lot of people talk about and Bank of America just did a piece on them talking about why they're bullish on cows for 2023.

I Personally think focusing on companies with free cash flow is a really good idea. I'm not the biggest fan of being extremely oil weight though. I do think having some oil exposure is a good idea as just a hedge. uh but uh yeah, look the Russell 1000 tracks the you know, largest 1000 large cap stocks and uh screening uh from those companies with the highest cash flow, the 100 with the highest cash flow.

Not a bad play and it's something to consider. That again is a passively managed fund so fees are lower. uh, but you know always when it comes to ETFs Make sure you read what the fees are, what the rules are for the ETF you could read a prospectus on ETFs but I wanted to provide some education on ETFs Hopefully this is really insightful for you again. This is if this video is not a solicitation for any of my own products.

my courses on building your wealth my ETF none of that that you know look I make lots of videos on this channel If you want specific videos, whether it's on real estate or actual recommendations that I make for for products or services or whatever, make sure to check out other videos. But this video is really just a general education video and I I don't want to ever come across that this video is some kind of pitch video to you. it's just hey, free suggestions for you to look into and if you found it helpful, consider subscribing and sharing the video. That's all I ask for in return in this video.

Thanks so much for watching! We'll see you in the next Goodbye.