An ETF (exchange traded fund) or index fund, is basically a basket of funds that are traded on an exchange, and they are a great simple way to diversify your portfolio. A few popular examples are the Dow Jones Industrial Average, and the S&P 500.
They very often have strong performance, allow you to invest in certain sections of the market (like tech or real estate), and provide a decent degree of safety through diversification.
The problem I have with them though is they are boring. Not only do I like picking which stocks to buy, but very often ETF’s or index funds will include stocks that I DON’T want to buy. Sometimes it’s because I don’t think they will perform well, and sometime it’s because I morally do not want to support the company.
I will never in a 1,000 years buy Facebook stock. I also have no interest in owning stock in oil/gas companies like Exxon.
Create Your Own Index Fund
The problem with making your own index fund is that it requires a lot of money to buy 10-100 different kinds of stock. A single share of Amazon or Alphabet can cost you well over $1,000. Multiply this by a hundred companies and you could easily need $30,000-$100,000+ to just have 1 share of each stock.
And forget about buying equal ratio’s of each stock. You’d have to buy over 10 shares of Microsoft just to have an equal ratio with 1 share of Amazon.
Introducing… Robinhood’s fractional share programs.
Sign up for Robinhood (get a free stock with this link) and you can now buy a fraction of any stock traded on Robinhood for as little as $1. You no longer need $2,500 to invest in Amazon or $275,000+ to invest in Berkshire Hathaway.
It means you can buy dollar amount of stocks, instead of whole quantities of shares. This makes it 100x easier to build your own ETF or index fund, because now you can easily buy equal quantities of a large number of stocks.
So after cashing out my recent options contracts to pay off my student loans, and in an effort to get away from basically just gambling, that’s exactly what I did.
Rules Of My DIY Tech ETF
I was inspired by the DOW which is comprised by only 30 large companies and is one of the oldest market indexes. Personally I find it very interesting that an index with only 30 companies has become such an important guiding metric of the market.
After diving deeper into traditional tech ETF’s that I had considered buying before, I was surprised by how such a large % of the ETF was made up of just a handful of companies.
XLK for example which tracks the tech sector of the S&P 500 is basically 20% Apple, and 20% Microsoft, and then 60% “random” of less than 4% each stock.
I am a true believer in the saying “tech will eat the world”. Looking at a number of different tech ETF’s, they have consistently, drastically, out preformed the S&P 500 in the last 10 years.
With that in mind, here’s the rules of my DIY tech ETF:
- Minimum of 10 stocks, with equal % of $ in each one.
- Minimum market cap of $100B.
- Minimum 5 year return of 150% (compared to S&P 500 average of 49.53%).
- Average Price Earning ratio needs to be under 50x, no more than 2 stocks over 100x.
- Needs to have a reasonable expectation of continued growth. Not just currently overhyped in the market (like Zoom, shots fired).
- No companies that I have moral/personal issues with supporting.
Here’s what it ended up looking like. 🚀
BABA | Alibaba, 1.37 shares
Not only has Alibaba out preformed the S&P 500 by almost 300% in the last 5 years, but it currently has a very low PE (price earning) ratio at 26.61x, compare that to Amazon with over a 120x PE.
The rest of the portfolio is very US heavy stock so I like the international diversity it brings as well. I’ve personally been importing items on Alibaba for over 7 years and I think they have a great product, with a lot of future growth ahead of them.
PYPL | Paypal, 1.90 shares
PayPal has been a giant of the internet payments industry for my entire life. In the last 5 years they have also out preformed the S&P 500 by over 600%. I believe that as online shopping continues to expand, so will PayPal.
My current reservations on PayPal is that with a 99x PE ratio it is currently overvalued (in my opinion), and the coronavirus pandemic has caused its stock price to increase to levels that I am not sure are sustainable. Overall however I think PayPal will continue to have strong long term growth.
MSFT | Microsoft, 1.95 shares
Microsoft has just consistently preformed well for a very long time, and I think it will continue to preform well in the future. Again it has has out preformed the S&P 500 by over 600% in the last 5 years.
My favorite thing about this share is that in comparison to PayPal which has had a similar 5 year performance, the Microsoft PE ratio is only 31.46x, which means I don’t think its current price is extremely over valued.
AAPL | Apple, 0.876372 shares
With a 1.52 TRILLION dollar market cap, Apple is one of the largest tech stocks in the world. Because of this it is harder for them to grow at such a large % as “smaller” tech companies.
Still, with a 179.21% return in the last 5 years, it has out preformed the S&P 500 by over 300%. Personally I think Apple has one of the best brands in the tech industry, and I think people will continue to buy and use Apple products for the next 30 years. Currently with a 26.89x PE ratio I think the value of the stock is relatively fair.
ADBE | Adobe, 0.976395 shares
Adobe products are great, and it has had a 422.28% return in the last 5 years, what’s not to like? The PE ratio at 52.91x is a little high and there are a number of new awesome competitors to Adobe products. That being said I think Adobe still has a lot of room to grow, and people are going to keep using their products to create premium high end content for a long long time.
AMZN | Amazon, 0.116948 shares
Amazon is probably my greatest hesitation in this mini ETF. With a PE ratio of 122x the stock value is probably currently over valued. In addition I have a number of ethical hang ups that cause me to pause before buying.
That being said I don’t think Amazon is “too” evil for me to write it off, yet, and I don’t want to be the person who bets against Amazon taking over the world. Not only is our own company built on top of Amazon AWS, but so is almost everyone else. If tech is going to eat the world, my money is on Amazon to do most of the eating.
SHOP | Shopify, 0.376388 shares
Ethically I love Shopify. My very first company was built on top of Shopify. I think that not only do they have a great product, but that they charge/operate in an ethical manner.
Their business model is also fantastic. They make money as more people create digital stores from both a monthly subscription, and through a % from offering merchant services. As E-Commerce continues to grow exponentially, so will Shopify, and they have demonstrated this with a 2,297.65% return in the last 5 years.
It is probably currently a bit over valued, but the long term potential I think is huge.
GOOGL | Alphabet Class A, 0.211859 shares
Alphabet, again, with a 1T market cap, is one of the largest tech companies in the world. While they struggle to have the huge % year over year growth that smaller tech stocks like Shopify enjoy, they have consistently have had great returns for the last 5+ years, and vastly out preform the S&P 500.
In addition with a 26.67x PE ratio, I think that Alphabet is a reasonably priced stock that will have consistent strong returns for the foreseeable future as technology continues to dominate the world.
MA | Mastercard, 0.848706 shares
My main thought process here was wether to go with Mastercard or Visa. Looking at the PE ratio’s, the dividend yield, and the analysis ratings of both companies, it’s basically a coin toss between the two.
I decided to go with Mastercard because while it is slightly smaller than Visa, it has been outperforming Visa in terms of growth. The smaller size also means that it has more room to grow than the larger company. Between the two companies, traditionally I have had a stronger favor for the product of Mastercard than Visa in my own experiences.
NVDA | NVIDIA Corp, 0.697831 shares
NVIDIA has had an incredible 5 year run with 1,660.48%, and while still overpriced, its PE ratio isn’t insane at 68.53x. NVIDIA graphics cards power the exponential rise of not only the gaming industry, but the personal bitcoin mining/hashing industry.
Having used their products for both my own gaming experiences and operating a small mining farm, I am a huge fan of their product. I think as these industries continue to expand, so will NVIDIA, and they have a future filled with strong potential for growth.
If I would have bought individual stocks of these 10 companies, not only would my portfolio be completely unbalanced leaning heavily towards Alphabet & Amazon, but I would have had to spend $5,000+ just to get 1 share of each.
With Robinhood’s fractional shares program, you can create a similar ETF with as little as $10 total or $1 per share. Go sign up if you’re interested and you’ll get a free stock when you join.
Now that I’ve paid down my debt, hopefully this mini DIY ETF will keep me away from option trading (probably not), and provide a greater than market average return as tech continues to eat the world.
And if nothing else, at least it was fun and a better use of funds than spending it on $25 hamburgers on Haight Street.