I like to make individual investments. I love being a part owner of something tangible that can grow my wealth over the long term.
However, despite my preference for being an active investor, I've passively invested in several high-quality exchange-traded funds (ETFs). I like to use ETFs to invest in a broader theme or another area I'm not comfortable investing in individually. I plan to add to my ETF holdings this month by buying a few more shares of SPDR Biotech ETF (XBI 0.38%), SPDR Portfolio High Yield Bond ETF (SPHY 0.11%), and JPMorgan Equity Premium Income ETF (JEPI 0.46%). Here's why I plan to buy more of these high-quality ETFs this month.
A broad bet on biotech
NYSEMKT: XBI
Key Data Points
Biotechnology is an amazing sector. It has made some remarkable breakthrough discoveries, including monoclonal antibodies, CRISPR, and mRNA-based vaccines. While I'm very interested in learning about science, most of what biotechnology companies do goes over my head. Because of that, I find investing directly in biotech stocks hard. They can be very risky since drug discovery and development can often have a binary outcome.
That's why I prefer to use a biotech ETF to invest in the sector. My preferred biotech ETF is the SPDR Biotech ETF. It provides very broad exposure to the space. The ETF had 124 holdings as of the end of last year. Further, this particular ETF tracks a modified equal-weighted index (S&P Biotechnology Select Industry Index). Because of that, each holding has a relatively equal weighting (instead of a higher concentration to larger market cap stocks). Its top holding only has a 2.8% weighting. That approach helps reduce the risk that one bad outcome from a top holding would significantly impact the entire ETF's performance.
Finally, the ETF's manager, State Street Global Advisors, charges a reasonable ETF expense ratio of 0.35%. That makes it a relatively low-cost way to gain very broad exposure to the exciting biotech sector.
One person's junk is another's treasure
NYSEMKT: SPHY
Key Data Points
The SPDR High Yield Bond ETF invests in non-investment-grade-rated bonds, often known as junk bonds. These bonds have a higher default risk than investment-grade-rated bonds. Because of that, they offer higher yields. For example, this particular ETF yields about 7.8% these days.
I find bond ETFs preferable to investing directly in bonds. Instead of trying to pick the right bonds, this ETF enables me to own a portfolio of over 1,900 bonds. I don't have to worry about bond laddering, default risk, or other nuances of investing in bonds. Instead, I collect a monthly income stream as the bonds make interest payments.
I get all of that diversification and income for a rock-bottom cost of only 0.05% (State Street recently cut the expense ratio of this ETF in half). It's now one of the lowest-cost high-yield bond ETFs, enabling investors like me to keep more of the income these bonds produce.
A premium income stream
NYSEMKT: JEPI
Key Data Points
The JP Morgan Equity Premium ETF is rather unique. Managed by venerable Wall Street bank JPMorgan Chase, this ETF has two income sources. It owns a portfolio of dividend-paying stocks. On top of that, it generates income from writing call options on the S&P 500 index. Those two income sources have enabled this ETF to pay an 8.5% dividend yield over the last 12 months.
The fund directly holds over 130 stocks, many of which have excellent track records of paying dividends. It distributes this dividend income to investors each month. Further, the fund's managers write out-of-the-money call options on the S&P 500 to generate additional income, which it also distributes to fund investors as part of its monthly payment. While those two income streams can vary from month to month depending on the call income generated and dividend payments, it has added up to a strong income stream over the past year (rivaling junk bonds).
The ETF offers that premium income stream for a very low cost, given its very reasonable 0.35% ETF expense ratio. That low rate enables investors to keep more of the income the fund produces on their behalf.
ETFs make it easy to invest
ETFs can be a great way to invest in things that are harder to evaluate individually. In my case, I'm using high-quality ETFs to invest in biotech stocks, junk bonds, and options strategies. These top ETFs enable me to do this confidently, conveniently, and cheaply, which is why I plan to buy a few more shares of each this month.
