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Quick: Choose between buying a biotech exchange-traded fund (ETF) that trades about 2.3 million shares a day or a tech ETF that trades less than 7,300 shares per day.
If you chose the biotech ETF, in this case you'd be wrong – but I understand your decision there.
After all, to make money in tech stocks you must consider volume, along with price action, fundamentals, and other factors. That's because some micro-cap stocks are so thinly traded that you might not be able to get out quickly should you need to.
Personally, I like to see at least 50,000 shares trading hands daily on small caps – and much more for larger firms. And 7,300 shares a day is far below those sorts of numbers.
However, when it comes to ETFs, volume is much less important than three other metrics you should consider when looking at these funds.
These three elements can mean the difference between riches and financial ruin.
So let's break them down…
The whole idea behind ETFs is to buy a basket of stocks in one fell swoop. By doing so, you gain instant diversification.
You can go as broad or narrow in your focus as you like. You could buy an ETF that's tied to the S&P 500, one that's pegged to small caps, or one that specializes in, for example, semiconductors or cybersecurity.
This is an asset class that belongs in every tech investor's portfolio. If you don't have the time or ability to pick the winners from the losers, with ETFs the stock experts do the heavy lifting while you pocket the gains.
No wonder they're so popular…
The total size of the U.S. ETF industry has increased by nearly 19% over the last 12 months, according to an analysis by Forbes. The global ETF market is worth some $4.94 trillion.
Not bad for an investment that got its start less than 25 years ago, in early 1993 with just one ETF. Today, there's no shortage to choose from. As of late 2017, there were nearly 5,400 ETFs traded globally, up from about 4,800 at the end of 2016.
Now, here's why volume should not be the deciding factor when you sit down to choose an ETF to invest in.
Unlike stocks, ETFs don't really rely on volume for true liquidity. Rather than in the ETF itself, we look for good volume in the stocks the fund holds.
If you want a way to get rich, this is all you need to know…
Let's say you find an ETF that tracks the S&P 500 but has volume of just 10,000 shares a day. That sounds illiquid. However, the stocks represented by this fund trade hundreds of millions of shares a day.
Should the ETF's price drift too far from its net asset value, asset managers known as authorized participants can step in to buy or sell shares. For that reason, even thinly traded ETFs will almost always closely track their underlying indices.
So instead of wasting time looking at volume, consider using these three ETF "Profit Screens" when searching for a fund to buy…
ETF Profit Screen No. 1: Expense Ratio
ETFs have gained so much popularity because of their low overhead compared to mutual funds, some of which can have management fees of 5%.
For my money, I rarely buy an ETF with an expense ratio above 1% – and I prefer 0.5% or even lower.
If you're considering two ETFs with similar ratings and performance, then choose the "cheaper" one. For instance, a semiconductor ETF with an expense ratio of 1% has double the overhead of one whose expense ratio is 0.5%
ETF Profit Screen No. 2: Morningstar Rating
About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.