How To Choose The Right ETFs For Your Portfolio, Chat With Steve Cummings

Yasi: Hey, hello, Steve. Welcome back to the Fast Track podcast. 

Steve: All right. Thank you for having me back on Yasi. 

Yasi: Yeah. I saw you have written a lot of articles about ETF. So I thought, why not bring you to my podcasts again, to help our audience understand what ETF is and why it is so interesting for average investors and exactly how they can put up a ETF investment portfolio.

So I think you might be a perfect person that I should bring into the show now. 

Steve: Well, thank you for having me on, uh it’s. Um, yeah, I love talking about ETFs and writing about them. I’ve got a couple more articles coming out this week about some tech ETFs. So hopefully I can give some good insight to educate more investors on what an ETF is.

Yasi: Yeah. 

Um, also, let’s start with the very first question. If in case sound, the audience have not heard about ETF or they have heard about it, but do not understand it fully. Can you tell us what exactly is ETF? 

Steve: So an ETF, um, ETF stands for Exchange Traded Fund. So it is a pool of securities or stocks that can be traded on the stock market, like a stock, but it’s not a stock because it’s a whole bunch of stocks together into one fund.

Yasi: And how does it work? Like when you say it’s a whole bunch of stocks together into one fund some people have asked me in the past, you know, how much does he cost? It’s a very expensive, if they have to buy a lot of fund, how would you answer that? 

Steve: Well, um, brokerage companies they’ll come together and they will, um, maybe to look at an index like the S and P 500 is a famous index in the USA.

Um, and across the world, everybody knows about it. It’s got the top 500 companies in the USA. And so a brokerage company may want to make a fund of all those companies. So all the 500 companies, and they’ll weigh them by basically by market cap, depending on how they’re weighted in the index. And so they’ll basically buy shares, um, of each, uh, company and kind of weighed them towards that.

So let’s say the S and P 500; you have Apple, you have Microsoft. Those are the top two, and Apple is about 6% of the S and P 500. So an ETF will basically have like Apple, Microsoft of Amazon, of those 500 companies. And then they’ll buy about 6%, make Apple basically 6% just so they can match it.

So the S and P 500 goes up, let’s say, 20% in one year, your ETF should, go up about 20%. Now it won’t go perfectly up, because like you mentioned before, there are fees associated with ETFs. And so those are some things that will bring uh, the return a little bit down, just a tiny bit, depending upon how much the fee is and how much it costs to do business.

Yasi: Yeah. Well, I’ll have a question for the fees later. So let’s look at an ETF that has the basket of 500 different companies. How would the found price? One of the found shares, just give our audience some basic understanding. How can they buy, how much would they expect to spend to invest in this kind of ETFs?

Steve: It would depend upon how big the, uh, I would say the ETF is. So, what I mean by that is how much money is being invested into it. Like if you have not just buy 500 companies, but if you have like an ETF that has like a trillion dollars in it well, not that’s a big ETF, it has, like 10 or $20 billion dollars the price is going to be a little bit higher. If it has, let’s say just, um, like $1 billion so price can be a little bit lower. And that’s because maybe the ETF is newer. And more older ETFs they’re traded a little bit more and they have more money into it, which makes it easier to trade, like on options, but that’s, that’s something different. But like, uh, one of the famous ETS is S P Y, which is, um, sales for SPY, it is made by state streets.

And this was created in 1993. As an ETF for the S and P 500. Now this price is much higher than most of the other S and P 500, because it’s got a lot more money invested into it. And that’s why the price fluctuates up and down.

Yasi: So the price of one ETF, um, that’s not mean like one, they all tracking the same index.

For example, SNP 501 ETF might be more expensive per share price might be more expensive than the other one. Just because how much liquidity or how much money were invested in the ETFs? 

Steve: That is correct. Yes. 

Yasi: Okay. 

And another thing I want to differentiate here, um, just for those who have not started investing in ETFs, that we talk about S and P 500 is index, but there are different companies there that they are tracking the same index and they’re all ETF.

So can you elaborate a little bit on that? 

Steve: Yeah. There’s a lot of S and P 500 ETFs. And basically brokerage companies that will come up and they’ll create their own ETF. Like I said, yeah, State Street, they have S P Y you have Vanguard, they have VOO. Um, and then you have like, um, I shares, I think it’s, uh, IBV uh, those are all ETS.

And so basically a brokerage company is going to come out and they’re going to make their own. And what they need is they need a lot of funding to come in and be able to buy shares. So then they can create this fund. So then they can put it on the market and sell to other people. . 

Yasi: And why does so interesting for average investors to look into ETFs instead of stock-picking?

Steve: Well, it makes it easier, um, to not, I guess, to not lose almost, um, I can’t say lose because like, if you pick one stock, I mean, you’re not very diversified, but if you have an ETF has 500 stocks or has a thousand or 4,000, and if one of those companies goes up, like goes up, ETF goes up. But if one of those companies just crashes out maybe it doesn’t go down as far. I mean, if you have more companies brings in more diversity it makes it more diversified. So then if one company fails, maybe you don’t see it as much, but if a whole bunch of companies all are in the green one day, then it’s going to go up in price. It makes it easier on your portfolio.

Like the S and P 500, went up about 26, 27% in 2021. Now, if you have an ETF that tracks all 500 companies, your ETFs can go up that price. Now let’s say I owned a company like Apple and Apple did poorly. Well, they didn’t do poorly in 2021, but let’s say they did. And, someone else has the ETF S P 500 and they did really well,

but Apple did not. Well, I mean, obviously the ETFs kind of do better because it’s not weighted by one company. And when you’re trying to pick out just one stock, you have to do research. You need to look at their financials. You need to look at what the company is trying to sell, what profits coming in, or they projected.

You want to see the price towards expense ratio. You want to see all sorts of different things and, it becomes hard, becomes confusing and you have to do a lot of studying. Now if an ETF, um, you don’t have to worry about that as much, because usually they’re picked by the brokerage company.

And usually, an ETF is done passively, so the fees are very low. The brokerage company is tracking an index and therefore if, if stocks go up ETF can go up. Stocks, go down, ETF goes down, but in the long run, not just one day or a month or a year, but maybe 5, 10, 20 years, it’s just going to keep going up because it is very diversified.

Yasi: Yeah, that’s a very clear, very good explanation. Thanks, Steve. I often have people ask me, um, you know, they have to spend a lot of time to invest and understand, read the news, you know, how to start investing. And my answer is always look into ETF’s. 

Steve: Yeah, it makes it easier.

You can start with little bit of money and you can, just go in and you’re like, okay, I got hanging this, I can automate it. I can keep it going. And boom, you’ve got like a big portfolio full of many investments. 

Yasi: Yeah. And you don’t need that much money to invest in individual stocks like through one ETF, basically.

Let’s say how much is one share of S P Y ?

Steve: I know V O O is about three 80. 

Yasi: Yeah. Let’s say if you buy one, 

Steve: share 47, 

Yasi: so 427. If you have 427 us dollars, you buy one share of this ETF tracking S and P 500. You have a tiny little bit shares of all those 500 companies. So as an investor, you don’t actually need

that much money to invest in 500 different companies. Right. So it’s a very good vehicle for diversification. 

Steve: Yeah. And companies like Amazon, um, one share of Amazon costs around $3,000, but with VOO you’re getting it for, um, $427 and you can keep buying more and more and you’ll still have Amazon.

Yasi: Yeah.

Steve: You just won’t have that one full share. It’s like a little bit of fractions, but you also have Apple. You also have Google. You have, um, you have companies that may have not made it up yet, and people haven’t heard about kind of like Tesla. Tesla just came out of nowhere and then boom, you don’t have to individually invest into one share Tesla,

it’s already there in the ETF.

Yasi: And the other ETF that is very popular nowadays is VT. I know people who only invest in VT. Uh, so earlier you mentioned S and P 500. That is well known now. So now what is the VT from Vanguard? 

Um, VT is a total world ETF. Um, it’s got the US and it’s also got ex US companies in it.

Usually when people talk about VT is because, it’s like an all round ETF. You want to buy everything in the world, you buy VT and it’s that easy. You want to buy the best companies in the world? VT is a ETF to buy. And that just gives you exposure to not only US companies, but you can get exposure to Chinese companies, Australian companies, Japanese, Korean, you get exposure to the companies in Europe, like in Germany and Switzerland.

You get um, companies everywhere. And that makes it very diverse because all of a sudden you have companies they may spring out of nowhere and you still have a piece of it, which is good. 

And the return is also not so bad. I think it’s around 78% annualized return in the last 10 years or so.

Steve: That’s a pretty good return. 

Yasi: Yeah, that’s pretty good return. And in a way that, you bet on the global economy, right? Like some people ask me, oh, what if the market crashed? What if this happened? I was like, if you bet on the world economy, when the market crashed, when that crashed you, don’t worry about

your stocks anymore. You worry about your food, your water, your survival. The apocalypse comes. So you don’t worry about your ETF. So in a way, I like the VT because it was really for people who really don’t need to have spend a lot of money investing the stock market. Doesn’t need to start picking just bet on the global economy.

If you think the world evolves, the word keeps developing the technology, you know, it’s advanced by itself. Um, then you believe in the humanities advancement, then VT is like a representation of that belief. Yeah. And again, we have to highlight right. Whatever, ETFs, we’re talking about here is not a financial advice.

Steve: That’s true. And the good thing is it makes investing simple. I mean, instead of stressing and trying to do a lot of research, um, why not invest in something that’s owns everything. Which makes it simple. All you have to do is just put an automatic order. Don’t worry. It’ll automatically just buy.

And, you got lots of companies that will go up and in the long run, you’ve got a great portfolio. 

Yasi: Yes. And, coming back to the fees, right? So when people start to put together their own ETF portfolio, you mentioned, how would they start? What should they look at? You know, there’s info sheet, investor key information sheet, and there is lots of information there. What are the key information they need to pay attention to? 

Steve: One of the things I like to look at, I automatically look at when I go to like an ETF is the expense ratio. Now the expense ratio is the amount of money it costs to operate and manage this ETF. Some ETFs are very cheap.

Some ETFs will have a higher expense ratio, and therefore it will cost you more money in the long run. And so I always go and look at the expense ratio because if I can save money, I’m going to do it because maybe I can find a brokerage company that has, same kind of ETF, but with a lower expense ratio.

Um, that would be the number one thing. Because money talks and if you can save in long run, that’s great. Because 1% it’s going to cost you about a hundred dollars for every 10,000 you invest in that can add up. That’s about 10,000, if you have a million dollar portfolio. Now, if you can break down the expense ratio, lower to maybe a 0.04%, 0.09%,

wow you just cut out a whole bunch of money out that. And then you can still invest in a million dollar portfolio with 0.04% it is only $400 coming out of your pocket. Well, what are you going to do you want to spend 10,000 or 400? Well, that choice is easy. You’re going to spend just the 400. That’s the number one thing I would do.

Number two thing is I’m going to take a look and see what are the top 10 companies that are invested in the ETF and what percentage of those top 10 companies are allocated in the ETF. Most of the S and P 500, like VOO and SPY has the same top 10. And they’re about, um, 28% of the entire portfolio that shows me that it’s not one or two or a 10 stock companies.

Stocks are dominating the entire portfolio. There’s one ETF, an tech ETF called VGT. It’s a from Vanguard. There are two top stocks as Apple and Microsoft’s. Well, that’s not too bad, Apple, Microsoft, are a good companies, but they take up about 40% of the entire ETF. There’s 365 companies in that ETF. So then you see like, oh, well, if one of those fails, then you just hope the other, like 60% will do well.

So it’s waited way too much into those two. It’s a good ETF, as long as Apple and Microsoft are doing well, but you’re gonna want to look to see if there’s more diversification instead of that one may be made, look like at a QQQ. QQQ is another tech ETF that does like the NASA 100 and they’re more equal and weighted like, instead of 40% of the ETF, Apple or Microsoft, it’s more like 20%, which looks a lot better.

It makes me feel better. Like if one of those were to drop, then you wouldn’t lose as much money as VGT. Those are the two things I definitely like. I want to make sure how diversified it is. I want to look at the fees and, maybe I also want to look at the yield. The yield is, the percentage that the ETF can give back as a form of a dividends.

Sometimes, um dividend investors, they’ll look at a dividend ETFs. A famous one in the US is called SCHD. It is a Charles Schwab dividend ETF. It has got about a hundred companies and it’s a very famous one and the yield is around 3%. And so that’s good because then, you know, okay, I’m going to get 3% of a dividend back and all these companies are dividend growth companies, so they’re kind of grow.

And so they’ll grow and, the value. And they’ll also give me back a dividend. So some people like to get that money back. Some people want to be more into tech and see more growth. Some people may want to do everything and get like the VT. So those are the kind of three things I kind of look at it. What are the fees?

What’s the diversification and what is the yield or the dividends that they’re going to be given out. 

Yasi: Now, another thing I also want to add is, some of the ETFs they are physical and then there’s like a synthetic. I don’t know if you pay attention to those as well? 

Steve: Um, no, I haven’t. 

Yasi: So, the physical ones are the ones that the companies or the fund they actually have those shares or if it’s the gold,

yeah they actually have the backing and synthetic it’s on a paper, they don’t have the actual holding of those. 

Steve: I think in the US we call them a derivatives. I’m not sure, but I do know in Australia, some of their retirement funds or they call them super, they’ll sell you ETFs.

And instead of having the physical holdings, like you said, they have the paper ones. Which in my opinion, I feel like there, the paper ones are less safe because they don’t actually own it. It’s kind of like a mock it’s almost like a little fake, but it’s not. Yeah. But that’s my opinion.

It’s not advice or anything. It’s just my opinion. 

Yasi: Indeed. As far as I understand that it’s often recommended to buy the ETFs that they call it product structure, and then you have the physical, it’s better to buy the physical than synthetic, but sometimes you just cannot buy the physical. I think it’s about which one?

Maybe it’s oil or something that you just cannot buy the physical. 

Steve: Yeah. 

Yasi: And since you’re the US citizen, do you need to consider some tax implications where this fund is from, or you don’t need to, because most of the ETFs are in the US? 

Steve: Yeah, I mean, taxes are always the thing in the US and one of the ETFs that you can get is, FXUS, which is an international ETF. So instead of getting VT, you could always get VTI, which is a total US stock market, and you can get FXUS. FXUS gives you more international exposure. That is in case you don’t want to get to VT. With FXUS, there’s some different tax implications because some of it’s coming from overseas.

And so you have to worry about some of those, and it’s got a little bit higher of a yield. So you got worried about that, but you also get a foreign tax credit as a part of that as well for being separate, instead of VT with all together. But with most of these a lot of people will put them in a taxable account or even we have retirement accounts called an IRA – individual retirement accounts.

 But in a taxable accounts, they’re more, taxs, there’s tax implications. So the higher the dividends, the more you’ll get tax depending on your income level, there’s also gains. Let’s say my ETF goes to up a thousand dollars and I sell it and, the gain would be a thousand dollars.

I sell it for that thousand dollar gain. I will have possibly a tax on the gain, depending upon my income level, once again. Now with ETFs, you can make taxes a little bit easier because let’s say you are under an income level, and you have like some massive gains, what you can do? You can sell some of these ETFs and then buy them back the same time.

So you can, kinda realize the gain and then you buy them back and that’s called tax gain harvesting. So then you less the gain, like if I have an ETF that I bought a 200, it goes up to 300 and I sell for 300, but then rebuy it back at 300. I got a gain. And if I’m under a tax bracket where I don’t have to pay taxes on it, then it’s almost like 0%.

And then it’s back up to 300, but I sell the same shares. 

Yasi: Then why do people do that? If you know, you have 100 gain, you sell at 300, then you buy back at 300, then the gain is not realized. I mean, you did the transaction, but then the money goes to the shares again. What’s the point of doing that?

Steve: It’s like a paper. You realize the gain, but you can subtract that from your taxes. Oh, wait. Let’s say, okay. So in the US, if you make under 40,000 as a single or 80,000 as a couple, any gains or dividends, , your tax is 0%. Once it goes up to the next level, like if you’re at 42 or maybe 82,000, it’s tax at 15%. So if you’re under that, and let’s say I’m at 30,000, and if I want, I can realize a gain of up to 10,000 without paying any taxes.

And then next year let’s say, I actually want to sell those, and now the ETF has no gains. So I pay no taxes, if my income goes up. So I realized the gain in order to kind of, have no gains in the future. Does that make sense? 

Yasi: So this year, if you are under 40,000, this tax bracket, so you realize the gain by selling your ETF $100 higher.

So you actualize already the gain, right. But you don’t have to pay tax. And then next year you buy it back at 300 USD per shift. 

Steve: I can buy it back at the same time as I sell it. So I sell it and then I just buy it back. 

Yasi: But if you don’t do anything, you still don’t need to pay the tax and you still do not have the $100 in your pocket.

Steve: That was correct. It’s a, it’s a tax. It’s almost like a tax, not avoidance. In the future where let’s say I buy the ETF a hundred bucks and it ends up in the future at a thousand. Now that’s a huge gain, if I were to sell it, and I’m in a certain tax bracket, maybe I have to pay a lot of taxes on it.

If the years before that, I start realized in the gain, so little by little by little, and let’s say, I go and sell it, and I have zero gains then I don’t owe any taxes.

Yasi: Oh, I think I slowly understand it’s on paper that you realize the gain on paper. In the year that you might not need to pay a lot of tax but then you still have the ETFs. But later on, when you are in the higher tax bracket and you sell them, but you already realize the gains in previous years, so your texts might be lower. 

Steve: Yes. 

Yasi: I need to digest this a little bit later. 

Steve: This is called tax gain harvesting. 

Yasi: Is in the US? 

It’s in the US. I would say not many people do it. I met a man in Taipei. His name is Jeremy Jacobson. He writes the blog Go Curry Cracker. And he taught me about this and he talks about it all the time.

It’s like, every year I sell stocks off or rebuy them back, so then the future, I don’t have any gains to be taxed. And I was like, what is this magic? Cos the most of people think of tax loss harvesting? Let’s say you buy an ETF for $200. It goes down 250. Well, in order to you have one that go up and you have one go down.

If you have a whole bunch that go down and loses money, you can sell those to kind of alleviate taxes, but don’t sell, just buy and hold for the longterm. 

So one point adding on that for those who are not in the US. So for example, me, I am based in Switzerland and I know that for me, the best solution is I buy ETFs

that is from for example, Vanguard – Ireland. Because Ireland has a tax treaty with the US. 

Otherwise the companies would only receive 70% because 30% is withholding tax. And then you imagine the Ireland Vanguard only gets 70% of dividends. Then it pays me in Switzerland, and then there’s another layer of tax between Ireland and Switzerland.

Steve: Yeah. And, and I’m in Taiwan and Taiwan doesn’t have a tax duty to the US either. So they have a 30% withholding tax as well.

So basically any dividends that come in, you get 70% because, the US does not have the tax treaty. I think Australia has got a 15%, tax treaty with the US but still, taxes can either way. 

Yasi: Yes. It could be interesting too, for the audience to look at,

you know, if the country where you’re living in right now, if you have a tax treaty with either US, if you have some investment from the US and other countries, then choose the ETFs that from, a country that has a taxt treaty with the US.

Steve: Well, and I know, there are companies in many different countries to sell ETFs.

I know Vanguard Scott, an office in Australia as well. They’ve got offices everywhere. They’re just keep expanding. They can create, ETFs for your own country, to kind of help out. Cause I know in Australia they’ve got different tax laws and so they’ll have ETFs that kind of help out with

taxes, in certain ways. And so, if you look at your country and you look at companies that create ETFs, first of all, I would look at kind of the companies they hold. Look at if the tax treaty is with the US so if it’s like a us ETF, and see how much taxes are being taken out. And also look at the fees.

Sometimes companies will sneak those fees in. I was talking to my brother about his retirement fund. It’s like: yeah, yeah, look, I got all these great ETFs and I’m looking at each one of them. I was like, oh, these fees are big. And he’s like, but they are ETFs. You, you talk about these. And so, sometimes we don’t look at the fees in this ETFs, they could be, 0.6% 0.9% 0.5%.

I’m inspired looking at the ones that are maybe 0.1% or 0.03% somewhere that’s lower. 

Yasi: Yeah, indeed. When it comes to long-term investing and over time, it, the fees can actually really eat up a lot of your profits. So if given the choices, uh, of course choosing the ones that has a lower fee, that makes more sense, right?

Steve: It makes sense to me. I like the low costs and I liked the, fees not taken out of, return. 

Yasi: Yeah, I remember recently you told me about the QQQM. I was not aware of that. And I was like, it’s amazing that exactly tracking exactly the same index, almost exactly the same performance, just from a different company and lower fee.

Why not? Right. I mean, this is just Steve and me, our personal choices. I mean, if you guys like, certain fund from certain company that you have more trust into it, then do your own research, make your own judgment. I think at the end of the day, it’s your personal decision and how you put things together.

So my last question about the ETF is, how can someone put up an ETF portfolio? Do you suggest them to look at a world, to look at the markets, to look at industry or just a general guideline, how will someone to put up their own ETF investments portofilo?

Steve: First of all, I would try to, get one that’s very broad and diversified.

So if you could get a world ETF, that would be good. If you could get one, like if you’re in the US maybe more, if you could get more US or even if you’re not in the US and you had like a one, that’s got lots of different companies that are makes it diversified. Um, because if you have 500 to a thousand to maybe 7,000 companies, that makes it very diversified.

 It’s a good way to create a good portfolio. Like VT, VT is a great one, or even any, ETFs that have more like a whole bunch of US companies. Because most of us, we know the US companies. You got Apple you have Google, you have Amazon. A lot of these companies, it’s hard if the ETF does hold these companies, it’s easier to just grab it a big US one, sorry for my bias, but US just has a lot of companies.

But it’s good to also have a broad, broad exposure to also international companies as well, because you got a Toyota and Samsung, you have companies like Pfizer, that’s in Germany and all these other companies everywhere. And then that would be probably a good chunk of your portfolio.

Um, that makes it balanced. Secondly, if you want to get into different sectors, look at different sectors. Like let’s say, if you want to do tech. Look at something that has more, an even amount of tech, like we just talked about QQQ and QQQM, and I just said this very fast, but three Qs and three Qs and an M those are tech ETFs that can really help out.

If you want maybe 10% of tech, you can get one of those ETFs and kinda make sure it’s around 10%. Maybe, you want something that’s all dividends. So, you can add like a dividend ETF into that big portfolio, but what I suggest just my opinion is, to have a more all around, ETF that encompasses a lot of companies, a lot of us companies and a lot of big international companies.

Yasi: Yeah, thank you so much. That’s very well summarized. I think what you talk about really can apply to majority of the average investors. If you don’t want to spend eight to 10 hours per day, staring to chart. Again, I would encourage you to do a little research on your own. Understand what suits you, because Steve talk about like dividends ETF,

then we’ll also talk about index tracking, ETFs, find out what suits you in your personal situation. Then probably today, what we talk about is to give you the fundamental knowledge to understand what ETF is and then or what you need to do afterwards. It’s really depends on you, right? Like you understand how it works, what are the fees?

What are the tax implications and how much you want to invest for one time horizon. So again, thank you so much for being here, Steve, thank you so much for contributing to this, very educational content for our audience. 

Steve: Thank you for having me. It was a joy to talk with you about this stuff.

Yasi: Yeah. And you write a lot of very interesting and useful articles. So would you mind sharing with us or the audience where they can read more about what you wrote and, follow you online if they’re interested? 

Steve: Yeah. Thank you. I right at, the frugalexpat.com and that is where I put most of my articles and posts.

I also am online on a Twitter. And my handle is @TheFrugalExpat, which is the number one. And you can find me I’m always on there. Um, or not always. I work as well, but, I’m there nighttime and the morning and I’m trying to have discussions with other people. So come follow me, come ask me questions.

I’m open ears. 

Yasi: And if you wondering why Steve calls himself Frugal Expert, I have another episode that I interviewed Steve about his personal journey, his personal journey to achieve financial independence, his lifestyle, his travels, and it’s really, really like my, my kind of like a dream life, because during the COVID I didn’t travel at all.

I was really envious. So check that episode out and follow Steve on Twitter. Check out his blog. And thank you so much for listening to this episode.