To The Moon

For different investors, ETF investment can be divided into different stages, with different methods and investment targets. After reading this article, you will be able to find the most suitable way to invest in ETFs.

The Beginner's Guide to ETFs - Choosing the Right ETF for Yourself

There are several steps to follow when selecting an ETF.

First, you need to have a clear idea of which sector you want to invest in using an ETF. For example, if you're interested in investing in the hottest chip companies, you would start by researching which ETFs focus on the chip sector.

Next, compare several important pieces of information to identify the best option.

1) Look for ETFs managed by large-scale management companies and reputable fund managers. 

One key indicator to consider is the Assets Under Management (AUM). If the AUM is less than 20 million, you can probably ignore it.

2) Examine the top 10 holdings and their respective weights.

Generally, if you are not bullish on the top 10 holdings, the ETF may not be suitable for you. Similarly, if a company you highly value, such as Tesla in the renewable energy industry, is not included in the ETF or has a significantly low weight, it may not meet your criteria.

3) Consider the management fees and dividends. Lower management fees are preferable, and higher dividends are generally better. By comparing similar funds, you can find the answers you need.

In the beginner's guide to ETFs, it's important to note that you don't need extensive market knowledge or individual stock analysis. This period allows you to gradually understand the market and develop your investment understanding with the right mindset. Keep in mind that this is not an easy task. If you can achieve this, you are already ahead of many other investors.

Advanced Strategies for ETFs - Focus on Asset Allocation

If you still have an active investment mindset, you will likely have gained some understanding of the market and may have identified stocks you believe in.

The investment return of stocks consists of three aspects: stock selection, market timing, and asset allocation. Stock selection and market timing are often the main concerns for individual investors, as they can help generate short-term profits. However, in the long run, asset allocation plays a decisive role in investment returns. The best way to optimize asset allocation is through the use of ETFs.

One popular method of optimizing asset allocation using ETFs is called the core-satellite strategy.

What is the core & satellite strategy?

The core-satellite strategy involves using passive ETF investments as the core holdings and combining them with multiple active investments as satellite holdings.The strategy aims to achieve excess returns while ensuring market performance.

How to choose the core investment?

In the core-satellite strategy, the core investment is of utmost importance, as research indicates that the majority of investors' returns come from this portion. Fortunately, selecting the core investment is not complex.

The best approach is to directly choose from the three major U.S. indices: $SPDR S&P 500 ETF Trust(SPY)$ , $Invesco QQQ Trust(QQQ)$ , and $SPDR DJIA ETF(DIA)$ . These three funds are well-diversified and have the highest trading volumes in the options market, providing flexibility for core investments.

All of the mentioned ETFs are equity-focused. If you want to further control risk, you can consider adding fixed-income investments to the core portfolio.

Among the mentioned ETFs, $SPDR S&P 500 ETF Trust(SPY)$ is undoubtedly the most prudent choice. Warren Buffett has advised investors that if they are unsure of what to buy, they should invest in an index fund tracking the S&P 500.

If you have a sustained positive outlook on the U.S. economy, then SPY is the best choice. If you consistently believe in the long-term growth of the technology sector in the U.S. stock market, QQQ, with its higher exposure to technology stocks, may better align with your investment expectations.

How to choose satellite investments?

After discussing the selection of core investments, let's now look at selecting satellite investments. This step tests the investment skills of investors and is crucial for achieving excess returns.

However, one important point to note is that the correlation between satellites and the core should not be too high.

For example, if you use $Invesco QQQ Trust(QQQ)$ , which has a higher weight in technology stocks, as your core investment, and then allocate all satellites to the technology sector, your portfolio will often experience simultaneous ups and downs, which will diminish the effectiveness.

In such a case, you can adjust the core to $SPDR S&P 500 ETF Trust(SPY)$ or diversify the satellites across multiple industries. This way, when there is a sharp decline in technology stocks, your portfolio will be more resilient to risks.

Furthermore, satellite investments don't necessarily have to be individual stocks; you can also choose ETFs. Industry-specific ETFs or strategy-based ETFs can be effective satellite investments as well.

What is the ideal ratio between the core and satellites?

Lastly, let's consider the ratio between the core and satellites. There is no definitive answer to the allocation ratio; you need to adjust it based on your risk tolerance, investment horizon, and investment amount. For example, when you are young and can afford to take more risks, you can allocate a lower proportion to the core and select ETFs with higher risk, such as QQQ, as your core holdings. As you age and accumulate more assets, your risk tolerance decreases, and you can gradually increase the proportion of core investments and replace some of the lower-risk core holdings, such as DIA.

Conclusion

As you can see, in the beginner's guide, investors don't need to have market predictions. In the advanced strategies, investors need to have some ability to judge market trends and understand individual stocks or industries.

After listening to my previous explanations, you should now be able to find your own ETF investment strategy.

Of course, if you believe you have a strong ability to predict the market and can effectively manage risks,you can also consider using options to enhance returns on core ETFs, using ETFs for risk hedging, and utilizing advanced strategy-based ETFs to increase returns, among others.