All investors are looking for one of two things: income or growth.
And if it’s growth you’re after, you’ve probably been tempted by the big returns from US tech stocks like Microsoft Corp (NASDAQ: MSFT) and Amazon.com Inc (NASDAQ: AMZN). However, I think there’s an even better option for most investors…
The problem with tech stocks like Amazon
Amazon looks like a great investment on face value, with the AMZN share price up more than 25% year-to-date and over 100% in the last 5 years. Anyone would be happy with those returns. The problem is, not many investors are actually getting that kind of return.
See, the biggest issue with tech stocks (and most high growth stocks) is that you pay for the growth with volatility. Here’s what I mean…
Five years ago, Amazon was trading at about USD$91, and today it’s trading at around USD$180. Great!
What that doesn’t tell you is what the journey looked like. If you take a look at the price chart over the last five years, Amazon went from USD$91 in May 2019 to USD$180 in November 2021 before it dropped more than 50% over the next year. That means, from May 2019 to early 2023, the share price was actually flat.
I don’t know about you, but I’m not sure I would have the stomach to keep holding onto it, waiting for the price to rebound. We all know that holding for the long-term is the best way to ensure a good return over time, but the fact is it’s easier said than done.
Smoothing the path
If I was looking for growth in my portfolio today I’d be looking at an exchange-traded fund (ETF for short) rather than Amazon. An ETF is a ‘basket’ of shares that can be bought and sold just like Amazon or Microsoft, but in one transaction you can get instant diversification across dozens or even hundreds of companies.
There are lots of great ETFs available on the ASX that focus on growth and even a few that focus specifically on US tech stocks, like the Betashares Nasdaq 100 ETF (ASX:NDQ) which tracks the 100 largest companies listed on the NASDAQ.
Owen Rask and Kate Campbell recently did a deep dive on ASX:NDQ and the Betashares Nasdaq Next Gen ETF (ASX: JNDQ) on the Australian Finance Podcast.
Why pick NDQ over Amazon?
I’d rather the NDQ ETF over Amazon. Why?
In one purchase, you can get shares of Amazon, Microsoft, Apple Inc (NASDAQ: AAPL),and 97 other top listed US companies. The benefit of this over buying Amazon shares is that you get a huge amount of diversification, spreading your risk over 100 companies instead of 1.
If Amazon shares fall 50% again, rather than copping that drop in isolation, the fall will be offset by another company, like NVIDIA (NASDAQ: NVDA), performing well. There’s always risk when investing, but ETFs can help to reduce your risk.
Can ETFs grow?
One common question is, can ETFs still grow over time?
Yes!
You can still get great returns. Over the last 5 years, the NDQ ETF has delivered nearly 20% per year growth. While you shouldn’t rely on past performance, it does show the potential of the ETF to deliver high returns over a long time period.
The return won’t be as good as picking the highest-performing tech stock each year, but the reality is… who can actually do that? I’d take the lower risk + growth option every time.
