By Michael Brush
Exchange traded funds are one of the best inventions for investors since the stock market itself. But they have one little problem.
Those pesky fees. They add up.
Popular sector ETFs like the iShares Expanded Tech Sector ETF /zigman2/quotes/204549158/composite IGM +2.16% , the Invesco S&P 500 Equal Weight Tech /zigman2/quotes/205983824/composite RYT +1.74% or the KraneShares CSI China Internet ETF /zigman2/quotes/205873167/composite KWEB -0.06% charge anywhere from 0.4% to 0.7%.
Put $100,000 into them and earn 8% a year over 15 years, and you’ll have $317,000, before fees. That ETF bite? You’d give up over $15,000. This assumes 0.55% fees.
That’s a lot of money. But there’s a hack for this: Buy and hold stocks on your own to build a homemade ETF. Heck, now that brokerages including Robinhood /zigman2/quotes/228268942/composite HOOD +5.60% and Charles Schwab /zigman2/quotes/201281754/composite SCHW +0.32% offer commission-fee trading and partial-share purchases, you can build your own S&P 500 ETF /zigman2/quotes/209901640/composite SPY +1.01% .
To keep things simple, it’s better to build ETFs that target promising sectors with far fewer stocks. The key is to choose the right sector. You want one that benefits from a long-term secular trend. My choice? Internet shopping.
Sure, by now a lot of people shop online. But there’s plenty more people to convert. Bank of America estimates global ecommerce will hit 24% of retail sales in three years, from 19% now.
“Ecommerce remains a top secular growth industry,” says the bank.
“Global” is key here. That’s because different regions have different adoption rates. Online shopping is more popular in many parts of Asia. The potential market size is bigger. In Latin America, adoption is still pretty low at 9.6% of retail sales, says Bank of America, compared to 27% in Asia and 18% in the U.S.
Latin America has a lot of catching up to do. In many emerging markets, ecommerce share is still in the single digits in areas like beauty, household goods and pet care. Your online shopping ETF has to get a piece of this catch-up growth. Mine has you covered.
I’m going with eight stocks suggested in a recent Bank of America note on global shopping trends. The bank actually suggests waiting till the first quarter to buy because of possible holiday season volatility caused by supply chain issues and labor shortages.
I think it makes sense to begin buying now, and add on any weakness. After all, the sector already seems discounted. It recently traded at an enterprise value (net debt plus market capitalization) of 4.1 times forward sales, compared to 5.4 times last year, and a five-year average of 4.3.
To average in, I always try to plan entries with at least three to five purchases. Consider my custom ETF a substitute for ProShares Online Retail ETF /zigman2/quotes/208410191/composite ONLN +1.66% , which charges 0.58%.
Before we get to the eight names, here is one more advantage to do-it-yourself ETFs. They’re superior to mutual funds not only for the fee savings, but because you choose when to take capital gains.
But wait, is this really an “ETF” with just eight stocks? I say yes, because they are carefully selected to give you a global reach into various subsegments of ecommerce, from appliances and apparel, to luxury goods, gaming and financial services. But it’s even better because it avoids the “diworsification” that comes with owning 50 stocks in a sector.