2 MUST OWN ETFs as Tech Stocks CRASH

[00:00:00] Speaker 1: The stock market has experienced some pretty significant turbulence over the past few weeks, particularly with technology stocks selling off due to concerns surrounding AI spending, stubborn inflation, and uncertainty surrounding the Federal Reserve. And if you only looked at the headlines, you might assume the entire stock market was struggling. But here's a look at the performance for both the S&P 500 as well as the tech-heavy QQQ ETF. S&P 500 down roughly 2% the past two weeks, and the Triple Qs down more than 6%, closing in on a correction. However, plenty of individual tech names are already in a correction, or even worse. But here's what's interesting. While some of the biggest technology stocks have been declining, several other sectors of the stock market have actually been performing pretty well. We have not seen broad selling in the market, but rather rebalancing of portfolios into more defensive sectors. And in today's edition of the Investor's Weekly Playbook, we are going to look at those areas that have been working in the market, look at the playbook for the week ahead, which is going to be a huge week, and then touch on two ETFs that are saving my portfolio and could save yours. So before we dive in, do me a huge favor and smash that like button down below. And also, let me tell you about my special workshop I'm putting on this week, a two-day valuation workshop, which I thought would be a great time to put this on right now, considering the volatility and the pullbacks we are seeing in the market. The workshop will take place on Tuesday and Thursday of this week, and all of those that sign up, you will receive the recording as well, in case you're unable to join during the live session. So check out that link down in the pinned comment and get signed up today as seats are limited. All right, let's jump into today's video. And as we stated from the start, the market headlines have had fear written all over them. Here's a look at the fear and greed index, which is sitting at extreme fear with a score of 21. And as difficult as it may seem, what is the old Buffett saying? Be fearful when others are greedy and greedy when others are fearful. Well, the markets are telling us they are fearful. But here's the thing. There have been a lot more sectors in the green than in the red, actually, the past few weeks. In fact, the RSP, which is the equal weight S&P 500, is up nearly 2% over the past two weeks. This is showing more of a broadening rather than investors just seemingly pulling out of the market entirely. Speaking of those other sectors, here's a look at performance of the 11 different S&P 500 sectors over the past month. And while the market indice as a whole, it's been down, as you can see, there's only three sectors that are actually underperforming the greater index. Industrials, technology, and communication services. They have some of the biggest weighting. But on the flip side, the leading sectors are consumer staples, it's up 10% in the past month. Energy up 9%, healthcare up 7%, and utilities up 5% over the course of the past month. Still plenty of sectors performing quite well, but these are also very defensive sectors. And that brings me to something I believe is extremely important for any type of investor, whether you're a growth investor or dividend investor, portfolio diversification. Because while I own plenty of tech stocks in my portfolio, I also have investments designed to provide exposure to completely different areas of the economy. And over the past few weeks, we've experienced meaningful selling pressures in tech stocks. And that makes sense when you consider some of the concerns investors are dealing with. We have elevated inflation. We have interest rates that remain challenging and high. And there's growing uncertainty surrounding the enormous amount of money being invested in AI. Investors are beginning to question whether some of these companies can generate enough revenue and earnings to justify their valuations and the money they're pouring in to AI. And when expectations are elevated, it doesn't take much disappointment to send a stock lower. So in essence, investors have been selling tech and buying up bonds and defensive stocks. And I believe that tells us something very important about the current market environment. Investors aren't necessarily abandoning stocks altogether. They're becoming more selective about where they're putting their money. Now let's talk about why these sectors are attracting attention. Starting with consumer staples. These are businesses that sell products that people like you and I continue purchasing, regardless of what's happening in the economy. We all have to put food on our table. We're talking about food, beverages, household products, and personal care items. Consumers might delay purchasing, say, a new car or upgrading their shoes or electronics. But they have to put food on the table. And they're probably not going to stop buying groceries, toothpaste, and things like laundry detergent. That creates relatively consistent demand. And when investors become concerned about economic growth, companies will become more predictable in terms of revenue. And that could become increasingly attractive to investors. Now, healthcare is another interesting sector. People need medications. We don't get sick and say, well, I need to go to the doctor. But what's going on in the economy? That's just seemingly not the way it works. But it doesn't make every healthcare stock defensive. But the sector includes many businesses with relatively resilient demand. Then we have utilities. These companies provide electricity, natural gas, and other essential services. And while their growth rates may not be as exciting as, say, some of the tech stocks we talk about on a regular basis on this channel, they can offer relatively predictable cash flows. Utilities also have an interesting connection to AI. Because all of these AI data centers that are being built require enormous amounts of electricity. So, even some traditionally defensive companies may benefit from long-term growth in power demand. And finally, we have energy. Energy has been one of the strongest sectors of the year. But I want to make this important distinction right here. Energy is not necessarily defensive in the same way consumer staples or utilities are. Energy stocks are heavily influenced by commodity prices. And geopolitical tensions have played a major role in the sector's recent performance. So, while energy has been strong, that doesn't mean it carries the same risk profile as traditional defensive businesses. And that distinction matters when we're building a diversified portfolio. Now, here's where I want to bring this discussion back to investing strategy. Because one of the biggest mistakes investors make on a regular basis is becoming overly concentrated into whatever sector has been performing best recently. And over the past several years, undoubtedly, that's been tech. And I understand why. Tech has produced some incredible investment opportunities. AI, cloud computing, semiconductors, and software have created tremendous wealth for investors. And I own several companies benefiting from those trends. And I will continue to do so. But here's the problem. If your entire portfolio consists of companies that respond to the same economic factors, you might not be nearly as diversified as you think. For example, imagine owning 10 different tech stocks. You might have some software stocks, some chip stocks, and other types of tech stocks. You might feel diversified because you own 10 different types of tech companies. But if all 10 are highly sensitive to interest rates, AI spending, or change in growth expectations, they could all experience significant declines all at the same time. Owning more stocks doesn't automatically mean you're better diversified. What matters is the underlying exposure. And that's one of the reasons I like having specific ETFs that are not as overly focused on the tech sector. Companies with established businesses. Companies generating regular cash flow. When tech stocks are struggling, other sectors can bring them up. And that's exactly what we've been seeing recently. Now, before we get into those two ETFs I want to cover, let's look ahead. Because next week could be one of the most important weeks for the stock market this earnings season. We have three major catalysts that could influence the direction of stocks that you need to be aware of. The first major catalyst is going to be the Federal Reserve. The Fed's next meeting takes place on October 27th and 28th. We're expected to get a rate decision. And with inflation remaining elevated, investors will be paying close attention to both the interest rate decision as well as Fed Chair Warsh's comments afterwards. Now, I don't believe the most important question is whether the Fed is going to increase rates or keep them unchanged. I think the bigger question is, in fact, what is the Fed telling us about the direction of monetary policy over the next several months? Because markets, again, they're forward-looking. Investors want to understand whether inflation is becoming more manageable, whether economic growth is beginning to weaken, and whether policymakers believe additional tightening could be necessary. If the Fed signals that inflation remains a significant concern, which I would imagine they do, that could create additional pressures on growth stock valuations. But if policymakers begin expressing greater confidence that inflation is moderating and under control, investors could become more optimistic, and we could see a jump in the stock market. And when it comes to what I believe is going to happen, I think rates are going to stay unchanged. One big reason for that is because their preferred gauge for inflation is PCE, which actually doesn't come out until after their meeting. And I don't think the Fed will have the answer they're looking for. Thus, that's why I feel like the Fed should keep rates unchanged, at least for October. But speaking of PCE, that happens to be the second major catalyst. Now, we've already seen concerning inflation data in recent weeks with both CPI as well as PPI. Both showed inflation ticking higher. So now it's time to see what PCE is telling us. And it can help us understand whether inflationary pressure is becoming more widespread throughout the economy. Here's why that matters. If energy prices begin moderating, but underlying services inflation remains elevated, the Federal Reserve may still have a difficult time bringing inflation back down to their 2% target. So we will see what the data says in the coming week. And now we get to what I believe may be the most encouraging part of the current market environment. Corporate earnings. This is where things get really interesting. Because while the S&P 500 has experienced some selling pressures, corporate earnings have actually continued to grow at a strong rate. And the numbers are impressive. So far, we have seen approximately 20% of S&P 500 companies report third quarter results thus far. And 83% of those companies have reported earnings that are higher than analysts' expectations. And they've been very strong beat rates. But here's the number I really want to focus on. The S&P 500 is currently on pace for approximately 30% plus year-over-year earnings growth. That's substantial. And this is why I believe investors need to look beyond the headlines. Because while stock prices have been declining in certain areas of the market, underlying corporate profits are continuing to grow, especially in the tech sector. And when stock prices decline while earnings are increasing, something important happens. Valuations can become more attractive. Let's use this simple example. Imagine a company trading at $100 per share. And they are generating over the trailing 12 months, $5 in earnings per share. That's a P-E ratio of 20x. Now imagine that stock comes under pressure. And the stock actually declines. The next earnings comes out. And now over the trailing 12 months, they've actually been generating $6 per share. Stock price comes down. Earnings go up. The P-E ratio now falls to 15 times. It's still the same company. In fact, it's a company growing its earnings at a stronger pace. So even though the stock price has declined, the business is actually generating more. And investors are now paying a lower multiple for those earnings. That's why I don't automatically view market pullbacks as a negative development. Sometimes there's simply an opportunity for valuations to reset. And we're beginning to see that at the index level. The S&P 500's forward P-E ratio is currently around 19 times, which is actually in line with the indices 10-year average. Now that doesn't mean the market is cheap across the board. And it doesn't guarantee stocks are about to rally. But it does suggest valuations have become more reasonable than they previously were. Next week, nearly 180 S&P 500 companies are scheduled to report earnings. So we're going to learn tremendous amounts of data about the health of corporate America. And I'm particularly interested in what management teams are going to say about future demand and margins and capital expenditures. Because earnings growth are ultimately one of the most important drivers of long-term stock market returns. So with that, I want to discuss two ETFs that I believe provide a valuable complement to my tech investments. And can continue growing whether the tech sector rebounds this coming week or in the coming months. And the first ETF should come as no surprise is going to be SCHD, or the Swab U.S. Dividend Equity ETF. And if you've followed my channel for a while, you know this ETF is one of the top five positions in my portfolio. And be sure you are a part of my private investing community so you can keep up with my entire portfolio. See my trades in real time, including option trades, market reports, and so much more. See the link down in the description below. But getting back to SCHD, it's funny because many of you understand why I own it and why it's a top five position. But many also give me a ton of flack for having it. I see comments like, Mark, why would you own this ETF? The growth is so much slower. Mark, the ETF doesn't have enough tech exposure. Well, well, well. We are seeing exactly why I own SCHD right now. Look at the difference this year between SCHD and the S&P 500. SCHD is up 27% on the year. Meanwhile, the SPY, it's up 11%. And that SCHD return is without any dividends being included. SCHD isn't just any old dividend ETF to me. It is the dividend ETF. The fund focuses on established U.S. companies with a history of paying dividends. But what's important is that it doesn't simply purchase stocks with the highest dividend yields, per se. It also evaluates fundamental factors designed to identify companies with stronger financial characteristics. That includes measures related to cash flow, profitability, dividend yield, and dividend growth. And I like that approach. Because a high dividend yield by itself isn't necessarily a positive. Sometimes a stock has a high yield because its share price has declined significantly. And that can be a big warning sign. I would much rather own companies that generate enough cash flow to support their dividend and the potential increases to come. And that's one of the reasons SCHD has become so popular among dividend investors. Now, let's take a deeper look at SCHD. And this is what I refer to as a low-cost ETF. The expense ratio is just 0.06%. That means for every $10,000 invested, the annual fund expense is approximately $6. That's extremely inexpensive. From a dividend perspective, the ETF has a 3% yield. And we have seen dividend growth for 14 consecutive years. From a portfolio perspective, let's first begin by looking at the sector breakdown. And as you can see here, the largest sectors include healthcare, consumer staples, tech, and energy. And if we think back to the best performing sectors the past month, three of those top four sectors, not including technology, were at the top. Hence why SCHD is doing well. It gives me balance. I continue to say SCHD is the greatest compliment to a tech-heavy portfolio, to the S&P 500, to the triple Qs. So for me and my portfolio, it's not only a top five holding, but it's also a must-own in my eyes. And the ETF itself owns roughly 100 companies. Now, here's where things get interesting. Let's look at some of those largest holdings. We have Texas Instruments and Qualcomm, happen to be two tech companies. Then we have Procter & Gamble, Coca-Cola, Chevron, Merck, Amgen, UnitedHealth Group, Home Depot, Verizon, and ConocoPhillips. Now, think about the businesses represented in that list. We have semiconductor companies, consumer staples, energy producers, healthcare businesses, home improvement, and telecommunications. That's a very different collection of companies from a portfolio concentrated in NVIDIA, Microsoft, Amazon, and other large tech businesses. And that's exactly why I like the fun. And before we move on to the second ETF, I want to remind you about my two-day valuation workshop that takes place this week on Tuesday and Thursday with all recordings sent to all enrollees. Link in the pinned comment down below. Now, let's move on to the second ETF I want to highlight, which is HDV, or the iShares Core High Dividend ETF. And while HDV and SCHD may sound similar, they actually have some important distinctions. Both focus on dividend-paying U.S. companies, both have relatively low expense ratios, and both can provide exposure outside of tech that dominate many broad market indices. But HDV places greater emphasis on high-dividend-yield companies that meet certain financial criteria. It tracks the Morningstar Dividend Yield Focus Index, and that creates a different portfolio composition. Here's a look at the performance on the year for HDV, another old dividend ETF outpacing the tech-heavy S&P 500, to the tune of HDV generating 24% return to the S&P 500's 11%. Like SCHD, this ETF is also low cost, with an expense ratio of just 0.08%. From a dividend perspective, you get a 3% plus dividend yield, but the ETF does lack the dividend growth that we saw with SCHD. Now let's dive into the sector breakdown, and this ETF is even more defensive than SCHD. Top sectors include consumer staples, energy, healthcare, and utilities. There you have it, the four best-performing sectors over the past month. Technology only accounts for about 1% of this ETF. Now let's have a look at the largest holdings in the portfolio. They include ExxonMobil, Chevron, AbbVie, Verizon, Procter & Gamble, Philip Morris, Home Depot, Coca-Cola, PepsiCo, and Altria Group. The top 10 positions account for 55%, and the total ETF has nearly 80 total positions. So when technology stocks have been struggling, the likes of HDV and SCHD have been benefiting from its exposure to other areas of the market. And that's precisely why I believe it can be a useful complement to growth-oriented portfolios. But I do want to emphasize something. HDV is not a risk-free defensive investment. In fact, one of the biggest things investors need to understand about it is its concentration in energy. Exxon and Chevron at the top, them alone represent a substantial portion of this ETF. And energy stocks, they've been great of late, but they can be volatile. If oil prices decline significantly, energy company earnings and stock prices could come under pressure. That means HDV could experience weakness, even if some of its more traditional defensive holdings remain stable. And here's another important point. Because HDV has fewer holdings and some relatively large individual positions, it can be more concentrated than investors might initially expect. So make sure when you look at those top 10 that we represented, make sure you like those stocks. So I wouldn't describe HDV as a substitute for a fully diversified portfolio, but I do believe it provides a different type of exposure than many growth-oriented funds. And that's where it makes it very interesting to me. Now let's bring these two ETFs together. Because you might be wondering, if SCHD and HDV are both dividend ETFs, why would I own both? And that's a fair question. Here's how I think about it. SCHD focuses on dividend-paying companies selected using a combination of yield, dividend growth, and fundamental financial measures. Whereas HDV places greater emphasis on those high dividend yield that have solid balance sheets. And because they use different indices and selection methodologies, their portfolios aren't identical. SCHD currently has meaningful exposure to companies like Texas Instruments, Qualcomm, Coca-Cola, and Home Depot. Whereas HDV has particularly significant exposure to energy, staples, healthcare, and utilities. So there is overlap. Both funds own companies like Chevron, Procter & Gamble, and Verizon. So owning both doesn't double your diversification. That's something I want investors to understand. But the funds still can play a complementary role. For me, SCHD provides exposure to established dividend-paying companies with the emphasis on the growth. HDV is going to give you that higher yield and a little bit safer. So when I combine those investments, those two funds, with my tech-heavy positions, ETFs, individual stocks, I believe it creates a much more balanced portfolio. Tech is still my largest weighting. This brings more balance, though. So now here's something else I want to emphasize. I'm not abandoning tech. I'm not selling any tech. Far from it. I still believe AI, semiconductors, cloud computing, and other tech trends will create substantial investment opportunities over the next several years. I'm buying the dip in some names. But before we stretch yourself even thinner, ensure your portfolio is properly balanced. Because leadership changes. The sectors outperforming today may not be the same sectors outperforming six months from now. Or even three months from now. And that's one of the reasons diversification remains so important. The goal isn't to own only what's working today. The goal is to build a portfolio capable of participating in the long term with all of the different growth trends that come and go. Okay? Not just one investment thesis. So here's where we stand. The stock market has experienced meaningful turbulence. Tech stocks have come under pressure. And investors are dealing with several important economic uncertainties. But benefiting the headlines, we are seeing some very interesting things go on. Staples, a lot of investors have moved into. Healthcare has been strong. Utilities are attracting more investors. And energy continues to benefit from its own set of economic and geopolitical factors. Meanwhile, corporate earnings behind the scene, they continue to grow at a very strong rate. And with nearly 30% earnings growth currently expected for this particular quarter, declining stock prices are becoming more interesting from a valuation perspective. Now, next week is going to be very important. We have the Fed. We have PCE. We have a massive wave of corporate earnings. All three could influence the direction of the market. But regardless of what happens next week, I believe there's an important lesson here. You don't have to choose between growth investing and dividend investing. You can own high-quality tech companies and you can participate in growth of AI. And you can also own established dividend-paying companies that provide exposure to completely different parts of the economy and help bring balance to your portfolio. That's exactly why SCHD and HDV remain important holdings in my portfolio. So now I want to hear from you. Which of these ETFs would you rather have in your portfolio? Is it SCHD or HDV? Let me know down in the comment section below. And also, let me know if you enjoyed this Investor's Weekly Playbook by smashing that like button down below. Subscribe to the channel. And don't forget about my valuation workshop coming up this week on Tuesday. And day two is going to be on Thursday. You can find more info in that pinned comment below. Thanks again for watching. And we'll see you in the next one. Take care.