What Lego Building Blocks Can Teach You About ETF Investing

by Nicholas Vardy
lego building blocks etf investing 0

Editor’s Note: To kick off the new year, we’d like to introduce The Oxford Club’s new ETF Strategist, Nicholas Vardy.

Based in London, Nicholas is an accomplished investment guru with several successful newsletters to his name. He holds a bachelor’s degree from Stanford University and a J.D. from Harvard Law School. He is also an associate of the Adam Smith Institute in London and the Chatham House think tank.

Nicholas will write several weekly columns for Investment U and will also help Chief Investment Strategist Alexander Green with contributions to The Oxford Communiqué. Nicholas is a widely recognized expert on exchange-traded funds (see his article below) and in the near future will offer an exciting new trading service based on this exploding asset class.

I think you’re going to enjoy - and profit from - what Nicholas has to say.

- Matt Benjamin, Editorial Director


Like most kids his age, my three-year-old son loves Legos - the colorful interlocking plastic bricks first made in Denmark in 1949.

Last week, we walked through the Christmas market in Leicester Square in central London.

Although Santa Claus was the star of the show, my son was more intrigued by the new Lego store, where the line snaked 100 yards outside the door.

Sure enough, we had to wait in the cold for 30 minutes before we could explore the wonders of the Legos inside.

Here’s what my son finds magical about Legos...

He gets to pick and choose which Lego blocks he likes. He can use them to build anything he wants. And he is limited only by his young imagination.

As an investor, you can say the same for exchange-traded funds (ETFs).

That’s why I like to think of ETFs as the Legos of the investment world. Like Legos, ETFs come in all sorts of colors, shapes and sizes. They offer an astonishing range of asset classes, investment philosophies and niche trading strategies.

In short, ETFs allow you to custom build any kind of portfolio you want.

You may already be familiar with ETFs. They look, feel and trade like stocks.

Technically, each ETF is an index fund. And each invests in an underlying portfolio of stocks, bonds, commodities or currencies.

Much like a stock, the price of an ETF changes throughout the day.

Large ETFs typically offer better liquidity and lower costs.

ETFs also enjoy tax advantages over mutual funds. When a mutual fund investor redeems their units or shares, the fund sells securities to pay them and generates a taxable capital distribution. When an investor sells an ETF, they just sell it to another investor and no taxable distribution is generated.

And with both retail investors and institutions climbing on board, interest in ETFs has exploded.

Consulting firm ETFGI estimates that ETF inflows last year (2017) hit $600 billion through November. That’s a remarkable 53.6% year-over-year increase from 2016.

With more than 300 providers managing 7,000 ETFs across the globe, total ETF assets have now hit $4.75 trillion.

Put another way, ETFs are almost 50% bigger than the entire hedge fund industry.

The Investment Building Blocks That Are ETFs

Today, ETFs invest in all major asset classes, including stocks, bonds, fixed income, commodities and currencies - as well as derivatives such as options and futures.

Using ETFs, you can invest in everything from the robotics industry to Russian small cap stocks.

Are you a committed “buy and hold” investor focused on low costs? I’ve identified an ETF that invests in almost every U.S. stock and charges a tiny 0.03% per year. The $3 a year you spend on every $10,000 you invest costs less than a cup of Starbucks coffee.

Do you have a favorite red-hot investment theme? Today, you can invest in ETFs focused on cybersecurity or artificial intelligence or the exponential growth of technology.

Do you want to try a specific investment philosophy?

There are ETFs for time-tested strategies like the “Dividend Aristocrats” or “Dogs of the Dow.” Other ETFs invest only in companies buying back their stocks or those selling shares in public offerings.

Do you believe the U.S. market will continue its “melt-up” in 2018? You can invest in ETFs that offer 2X and 3X leverage on the S&P 500 to turbocharge your gains.

Does the fear of a market crash keep you awake at night? Dozens of ETFs allow you to bet against - or go short - the market.

Global investing legend Sir John Templeton made his biggest fortune buying and holding Japanese stocks for 30 years. Yet Templeton made his quickest fortune betting on the collapse of internet stocks in 2000.

As the old Wall Street adage goes: “The bull climbs up the stairs, and the bear jumps out the window.”

Basically, while you can get rich slowly in a bull market... you can do it overnight in a bear market. That’s what Templeton did, and by using ETFs, you can replicate both strategies with the click of a mouse.

Building Your Ideal Portfolio Using ETFs

Like all those multicolored and differently shaped Lego pieces my son loves, ETFs today offer an astonishing variety of investment opportunities.

And you can assemble these Lego building blocks of investing any way that you want.

If there is a downside to investing in ETFs, it is this...

With more than 1,100 ETFs trading on U.S. stock exchanges, the choice among ETFs can seem overwhelming.

And the number of new ETFs grows by the day. Six U.S.-listed bitcoin futures ETFs are now in the works.

As The Oxford Club's ETF Strategist, I will guide you through the ever-expanding universe of ETFs.

I will help you separate the wheat from the chaff.

And I will help you build your ideal portfolio using the Lego building blocks that are ETFs.

Good investing,

Nicholas

Thoughts on this article? Leave a comment below.

One of Alexander Green’s Favorite “Legos”

Alexander Green is also a proponent of using “Lego block” funds to build a portfolio. In fact, his best-selling book, The Gone Fishin’ Portfolio, is based around this very idea.

What’s more, Alex’s Oxford Communiqué subscribers have profited handily from his ETF recommendations.

One of Alex’s most lucrative ETF holdings is the iShares MSCI Emerging Markets Fund (NYSE: EEM). Here’s Alex checking on the pick last spring...

Global investors shoveled almost $60 billion into developing market equities in the first three months of 2017, including $29.8 billion in March alone, the highest monthly total since January 2015.

Years of underperformance are suddenly turning into outperformance - and it’s not hard to see why.

The iShares MSCI Emerging Markets Fund attempts to replicate the return of Morgan Stanley’s emerging markets index. It offers exposure to more than 800 large and midsized companies throughout Asia, Latin America and Eastern Europe.

With more than $38 billion in assets, the fund gives you broad diversification, high liquidity and low expenses with high tax efficiency.

“But why should I invest my hard-earned capital,” an investor once asked me, “in places I wouldn’t even visit myself?”

First off, anyone who hasn’t visited Hong Kong, Argentina or the Czech Republic doesn’t know what they’re missing. But the real answer is performance and diversification.

Emerging markets will be an engine of world economic growth for decades to come. Consider the demographics. These countries contain three-quarters of the world’s land mass and nearly 85% of the people. China and India alone make up nearly a third of the world’s population.

Consumers in emerging markets need everything we take for granted in the West: housing, automobiles, healthcare, credit cards, computers, smartphones, insurance and so on.

However, countries like Brazil and India and China are not going to let Western firms come in and pick all the low-hanging fruit. If you want to reap the maximum benefit from the world’s biggest economic development story, you need to have part of your portfolio in these markets themselves.

Also, consider the diversification value. These stocks don’t move in lockstep with those in the developed world. In technical terms, when ours zig, theirs often zag.

- Samuel Taube with Alexander Green

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