Know What You Own

BCR Wealth Strategies |

We recently received a free trial for a Substack newsletter on finance.  I was browsing a recent post and a headline caught my eye: “How do I find a lower cost alternative to Nasdaq ETF QQQ?”

I did not remember it being that expensive so pulled it up quickly and found that it cost 20bps.  That is not expensive in the least, but I understand why someone might want to look around for something in the single digits for an index fund.

So, I scrolled down to the summary of that headline.  Without having to click any further I was given their two leading alternatives – VGT and XLK.  These are the technology sector funds provided by Vanguard and State Street.  They are less expensive than QQQ but neither get to single digit expenses.

But there was something far more important that immediately stuck out to me.  These two alternatives are technology sector specific and QQQ is a market-cap weighted fund of the 100 largest, non-financial securities listed on the Nasdaq exchange.  Two oranges and an apple.

Also, there was a big sector reclassification in 2018 that is easy to not be aware of or forget.  Firms like Facebook, Netflix, and Alphabet (Google) were transferred out of the technology sector and into the communications sector by major index providers like S&P Dow Jones and MSCI.  They are now classified with firms like AT&T and Verizon. 

Someone could read that article, consider it a trusted resource, hop into their account, and make a quick switch from QQQ to one of these “alternatives” to save themselves a few bucks. 

And just like that, you have a very different investment (You also dropped your exposure to Amazon and Tesla).

The companies you just unknowingly sold out of have provided some of the few positive returns in COVID-19 stricken 2020.  Was that your intention?

But it makes sense to me why someone would assume all those companies are in a tech fund.  We use most of them on our devices on a regular, sometimes daily basis.

But they are not in your new tech fund.

It does not matter that you consider these cool companies to have great technology.  Amazon is still considered Consumer Discretionary even though AWS drives its operating profit.  Tesla’s technology is amazing and forward thinking, but it is not an “Internet Technology” firm and thus, is not in a typical “tech fund”.

Facebook, Alphabet, and Amazon CEO’s just spent a couple of days in front of Congress attempting to defend themselves against concerns that they are monopolies and should be broken up.  It makes sense to me why people consider these firms “tech companies”.

Making assumptions is always dangerous.  It is important to dig a little further into investment fund alternatives you are considering.  You need to know what you own.  You might make more money with the switch, or you might make less.  Either result is luck because to a certain extent, you were choosing blind-folded.

It took me two minutes to open three chrome tabs to Morningstar, enter the tickers, and review the top 25 holdings.  I quickly realized that this headline was very misleading. 

This move is more than saving a few basis points in annual expenses.  This is a substantial tactical shift in investment allocation.

Someone with a platform was looking for clicks to make more money.  And they might drive you out of some of your top investment convictions.  Always do your homework and know where your investments are allocated.