Why Top Heavy ETFs are Like Stock Picking
Channel: Andriy Blokhin
Date: 2024-03-26

Many investors view ETFs as something to invest and forget. However, funds that are top heavy present unique concentration risks and are akin to picking stocks that foregoes the benefits of diversification. Prime example is Vanguard Information Technology Index Fund (VGT). Its top three stocks account for the 45% of VGT's total assets. 

There are even more extreme examples, such as ARK Innovation ETF (ARKK) by Cathie Wood. Back in 2021, the fund was not only top heavy, but was also loaded with unprofitable biotech and fintech companies that crashed the fund in 2021-2022.

There is nothing wrong with holdings these ETFs. But, in my opinion, they require more due diligence and research compared to broad stock market index funds that track S&P 500 or other total stock market benchmarks. Given the high concentration of these funds, an investor may need to do investment valuation work to avoid getting burned if these top stocks underperform.

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BOOKS RECOMMENDATIONS:
If you are still interested in trying individual stock picking, here are my top 5 books that made a big difference for my understanding of stock market:

1. "The Most Important Thing" by Howard Marks
   ► https://amzn.to/49X87Fs
Excellent generalist book on investing. It helped me appreciate the risk/reward relationship as well as why "second-level thinking" is so important in stock research.

2. "Investment Valuation" by Aswath Damodaran
   ► https://amzn.to/43paAWP
This is my favorite book on investment valuation. Prof. Damodaran is very well-known for his teaching of corporate finance and valuation at New York University. I took many of his free online classes and often consult this book when analyzing a company.

3. "The Intelligent Investor" by Benjamin Graham
   ► https://amzn.to/4ab9iB4
A timeless classic. The book underscores the importance of loss minimization, contrarian thinking and long-term view. Graham encourages investors to create a rational plan for buying stocks and bonds and steer clear of behavioral pitfalls. 

4. "Common Stocks and Uncommon Profits" by Philip Fisher
   ► https://amzn.to/49Z2CWA
Recommended by Warren Buffett, this book is a classic read on growth investing. Fisher covers many things on how to find great growth stocks that could be grow for a very long time. In the book, Ken asks a series of questions and treats them like a lens through which he analyzes stocks.

5. Valuation by McKinsey & Company
   ► https://amzn.to/495TFJL 
To me, this book is like a bible on investment valuation. It has all of it. Lots of practical advice with ample number of examples. Written by practitioners for practitioners. The book is thick and is not an easy read. But, it helped me tremendously to advance my analytical thinking and investment valuation skills. 

Subscribe to my channel @andriyblokhin  for more content about investing and personal finance.

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Related videos:
   ▶︎ The 1 Best Growth ETF to Hold Forever, If You're Young: https://youtu.be/XJSlhFKGnKo
   ▶︎ Problems with Dividend Stocks and How to Avoid Them: https://youtu.be/4RkVSYvXK9U
   ▶︎ Can Dividend Stocks Beat the Market?: https://youtu.be/qZt2tF3hyS0

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Timestamps:
00:00 - Intro
00:17 - Why Top Heavy ETFs are Problematic
01:53 - Why Researching ETF's Top Holdings is Necessary

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This video content is for informational purposes only and should not be viewed as legal, tax, investment or financial advice. Please, do your own due diligence, consult a professional and keep your money safe.

#etf #investing #investing 

Music Credit:
Marty Gots a Plan by Kevin MacLeod is licensed under a Creative Commons Attribution 4.0 license. https://creativecommons.org/licenses/by/4.0/
Source: http://incompetech.com/music/royalty-free/index.html?isrc=USUAN1500015
Artist: http://incompetech.com/

Image Credit:
Caroline Wood via Wikimedia Commons
CC BY-SA 4.0
https://commons.wikimedia.org/wiki/File:Cathie_Wood_ARK_Invest_Photo.jpg

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