What's up guys and welcome back to wall street millennial etfs for exchange traded funds have emerged as a great way for investors to invest in the stock market before the days of etfs and passive. Investing investors only had two options. First, they could do research on individual companies and buy stocks that they think are good investments. Secondly, they could pay professional money manager to do this for them.

However, eighty percent of professional money managers in the uf's underperformed the s p 500 over a five year period. This number only grows if you look at longer time horizons. If you don't have time to pick stocks on your own and you don't want to pay fees for a fat cat money manager on wall street, your only option is to go with a passive etf. You can think of an etf as a basket full of stocks by owning one share of an etf.

You own, a tiny sliver of each company within its index. The simplest etfs are broad index etfs, such as the spy which tracks the s p 500 index of the u.s stock market. The spy is one of the easiest ways to invest and has experience on average annual returns of 9.96 percent since an inception in 1993.. However, there are thousands of etfs available to choose from in this video we'll go over the top three etfs that have the potential to perform even better than the spy going forward before we go any further.

Keep in mind that this video is, for entertainment purposes, only make sure to do your own research and consult with the professional before making any investment decision. First, we have the ishares microcap etf, which trades under the ticker symbol iwc. This fund owns a basket of microcap u.s stocks with all stocks in the etf having a market capitalization of less than 5 billion. The iwc etf benefits from the so-called small firm effect, which is the tendency of small cap stocks to outperform large cap stocks over long periods of time, nobel prize winning economist, eugene fama studied the small firm effect extensively and found it to be very robust in many Stock markets around the world, there seems to be a highly persistent tendency for small cap stocks to outperform, while the causes of the small firm effect remain controversial.

One of the most prominent theories is that it results from cognitive biases on the part of investors. People are more likely to invest in a company when they know a lot about the company through their day-to-day lives. Since everyone knows about apple, they all buy apple stock bidding up the price of the stock. This can potentially cause the stock price to become too high.

Making it overvalued and decreasing its expected return going forward. On the other hand, you could have a small manufacturing company that makes niche products such as a replacement part for industrial printers. They might be a great business with high profitability, but because very few people know about them, there will be very little demand for the stock and the shares will be undervalued. Eventually, the overlooked small cap stocks generate so much free cash flow that they can start paying dividends and repurchasing their own chairs.

This allows them to increase their shareholder returns, even if most investors never take notice of them just because small cap stocks tend to outperform over long periods of time. This doesn't mean that they will outperform in every given time frame. This chart shows the relative performance of the small cap russell 2000 index versus the s p from 2001 through 2014, the small cap stocks outperformed by a significant margin. However, from 2014 onwards, small caps lost their edge and underperformed relative to the s p.

500. The under performance can largely be attributed to the mega cap tech stock, such as facebook, amazon, apple netflix and google. Their stocks have massively outperformed over the past few years, since they're included in the s p 500, but not included in the small cap index. The small cap index underperformed, but the iwc microcap etf appears like, is making a comeback in the reopening trade.

As of july 6, 2021. It has risen to 50 above its pre-pandemic levels. During the same period, the spy is up less than 30 percent. Next on the list, we have the invesco s: p 500, equal weight, etf, that trades under the ticker symbol rsp.

This is an s p, 500 etf, but instead of weighting each stock by market cap, it weights all the stocks equally apple, which has a 2.37 trillion dollar market cap has a 0.2 weighting in the rsp etf news corp, which has a 14.84 billion dollar market cap, Has the exact same weighting of 0.2 percent in a regular s? P 500 etf, such as the spy apple, would have a weighting 1600 times greater than news corp. So why is this significant within the s p? 500. Some stocks are undervalued, while others are overvalued. Obviously, it's better to own the undervalued ones, but the problem is: we have no foolproof method for differentiating between undervalued and overvalued stocks.

But what we do know is this: when a stock is overvalued by definition, it will take up more than its fair share of space. In the market cap weighted index, that's because its inflated stock price gives it a higher market cap. On the flip side, undervalued gems get very little waiting because their market caps are smaller than their fair value. The market cap weighted index by its varied design, overweights overvalued stocks and underweights undervalued stocks.

The equal weighted index corrects for this flaw, and this is proven in the data. Since the rsp's inception in 2003, it has increased in value by 481 percent. That's 117 percent greater than the market cap weighted spy's 364 performance over the same time period. Last on the list.

We have the leverage etfs the three times leveraged s. P. 500. Volt etf multiplies the spy's daily movement by three times.

If the spy is up one percent in one day, the leveraged etf will be up three percent and vice versa. The three times leveraged etf has increased in value by 27.6 fold since its inception in 2008.. This dwarfs the spy's return of 400. During that same period, the main criticism of leverage etfs is that their daily rebalancing causes a volatility drag which decreases the expected return.

The basic idea is as follows: the stock market has a very weak tendency to mean revert on a daily basis. This interacts with the daily rebalancing and causes a small negative return bias, so even in periods where the underlying index is flat, the three times leveraged etf may actually decrease in value. However, there's actually a way that you can make volatility drag work in your favor. In addition to three times leveraged etfs, there are also three times leveraged inverse etfs such as the spxs.

If the s p 500 is up one percent, the spxs will go down three percent and vice versa. The volatility drag degrades the returns of the inverse leverage etf, in the same way that it does for the regular three times, leverage etf since spxs inception in 2008. It has declined in value by 99.97. This represents a compounded annual decline rate of 46 per year.

Over long periods of time, the stock market tends to go up which makes spxs go down. Additionally, it is hurt to some extent, by the volatility drag a strategy to take advantage of this is shorting spxs. This is a high risk, high reward strategy over long periods of time. It will make a lot of money because spxs almost always declines in value in the long run.

If you started shorting spxs at its inception in 2008 and continuously readjusted your position as it declined in value, you could have made 46 annualized gains. This would have netted you a 136 times return over the past thirteen years. You could have turned one thousand dollars into one hundred thirty six thousand dollars. However, this is a highly risky strategy during market crashes, spxs can as much as double in value.

If you don't have enough equity in your account, this can trigger a margin, call forcing you to close your position at the worst possible time. However, you can't make 136 times returns without taking on at least some risk. There is a perception that short selling is a sophisticated investment strategy reserved for only hedge funds and other institutional investors. While it is true that you can't short stocks on robinhood, there are many retail brokerages that support the practice.

For example, interactive brokers allow short selling on individual brokerage accounts. Anyone can do it with that being said, shorting is a highly risky practice in general shorting, a leverage, etf, further compounds the risk you have to take into consideration, collateral requirements, risks of a margin call and the cost of borrowing the stocks short selling can be a Quite complicated thing and should not be done by novice investors, alright, guys that wraps it up for this video. What do you think about these etfs? Are there any others that you think we should have included in the list? Let us know in the comments section below, if you like, this content, make sure to hit the like button and subscribe, so you don't miss our future uploads as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.

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