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Do you want to invest in the stock market, but would you be able to say no to tech giants like Apple or Tesla? Well, that's precisely what one of the brightest minds in the investment world, Peter Lynch, tells us to do. Hello, my name is Gonçalo Malheiro, and I'm a certified financial educator, in addition to creating content for social media such as Instagram, YouTube, and TikTok.
Today, together with Rankia, I'm going to talk about why Peter Lynch advises against investing in large tech companies and where he thinks we should invest. To do this, we'll analyze two ETFs that, according to Peter Lynch, are two hidden gems in the stock market. So pay attention because this strategy from Peter Lynch can completely change your investment portfolio.
Before we go to the video, I must mention that this content is solely for entertainment purposes and does not represent any type of financial advice, investment recommendation, or investment strategy recommendation. That said, let's start with the video and compare ETFs with tech stocks and why Peter Lynch likes the former so much.
So why does such a relevant investor as Peter Lynch tell us not to? Investing in large technology companies is a good idea because Peter Lynch, known for his impressive results in the stock market, sees a slightly different outlook for the current market. While technology stocks are attractive and completely dominate global stock markets, they may not be the best option for long-term growth.
This is where the idea of investing in small-cap ETFs comes in. These ETFs focus on investing in smaller companies with less market capitalization than large technology companies. But why does this make them so special? Peter Lynch argues that these often undervalued companies, which don't attract as much attention from investors, can offer significant growth potential.
We have to consider that if we want to make money, we have to buy low to sell high. If we put our money into these large tech giants that are already at all-time highs, although they have some growth potential, that potential isn't very high. So let's see why we should invest in small-cap companies.
But before we get to that part of the video, I want to tell you that Rankia has a newsletter where you can access exclusive content that will... This can considerably help in your learning process and deepening your knowledge in the world of investments. So, if you want to subscribe to Rankia's newsletter, just go to the description where you'll find the link to subscribe and access this exclusive content.
Therefore, why investing in small market capitalization companies can be a good investment opportunity? First, let's compare the bear market with small-cap companies. Peter Lynch points out that we have indeed been in a bear market for roughly the last two to three years, with the exception, as is natural, of large technology companies like Apple, Tesla, or NVIDIA.
While AAS like the S&P 500 or Nasdaq, which were completely driven by these large companies, performed well, the rest of the market actually underperformed, with many stocks still trading below 2018 values. Then we also have the issue that 2023 showed better-than-expected economic growth in the United States.
Despite the possibility of recession, consumption remained stable, inflation decreased, and the labor market remained stable. This data is important because historically, small-cap stocks have managed to outperform large- cap stocks during periods of economic growth and decreased inflation. Another reason is that small-cap companies have advantages in terms of potential stock appreciation.
If we look at the S&P 500, we see that its future P-ratio is below historical averages. Why? Because on one hand, we have large technology companies, the mega-companies, which have very high P-ratios and are overvalued compared to their historical P-ratios. On the other hand, we have small-cap companies with low P-ratios and are undervalued compared to these large companies.
This means that these small- cap companies can represent good investment opportunities with quite significant appreciation. So let's look at the ETFs recommended by Peter Lynch, which are exactly IWM and VB. So now let's go to the computer to Seeking Alpha to see the composition of the ETFs, their returns, expense ratios, among other things.
So we are here in Seeking Alpha, and this is the first ETF, IWM. This ETF tracks the Rustle 2000 index, which includes the 2000 largest American companies. Looking at the holdings, we have 16% in technology, 16% in healthcare, 15% in industrials, 15% in financials, etc. Its top 10 largest stocks aren't the ones we're used to seeing.
Generally, when we look at the S&P 500 index, for example, the largest stocks are Apple, Tesla, Microsoft, Amazon, NVIDIA, among others. Here, its largest holding represents only 1% of the index (1% of the ETF) and is Super Microcomputer. We have companies here that, honestly, I don't know. But we have different companies, and companies with smaller market capitalizations than we're used to.
As I said, Apple, Microsoft, etc. These are the top 10 stocks in terms of sectors. As I said, technology, healthcare, industrials, etc. In terms of returns over the last year, this ETF has a return of 5%. In the last month and a half or so, we've fallen 0.7% by about 1%. Over the last 5 years it has given us 32%, in the last 10 years 74%, and since this ETF has existed, that is, since the year 2000, it has given us 290, so we have a dividend yield of 1.36 per OK or $270, given that this ETF has a price of around 200 and we have an expense ratio of 0.2 per.
The expense ratio isn't very low, but it's not significant either. Generally, S&P 500 Rand ETFs yield 0.7% to 0.1%, this one is at 0.1%, but that 's not very significant either. Then we have the VB ETF. Okay, this Vanguard Small Cap Index... As you can see, this ETF has a price of $200. Let's look at the returns over the last year; it gave us 6.77 per...
And to date, in other words, in the last month and a half since January 1st, it gave us an additional 0.4%, in the last 5 years an additional 42%, and in the last 10 years an additional 94%. And since the ETF has been available, that is, since 2004, it has given us an additional 335%. If we look at the holdings here, we can see their largest positions.
We can see that the sector with the most weight in this ETF is exactly the industrial sector with about 20%, followed by the technology sector with 16%, the consumer cyclical sector with 13.6%, then the financial sector with 13%, the healthcare sector with 11%, etc. Their largest positions are exactly here.
Now we have Builders First Source, that is, companies that I honestly don't know. Okay, and their 10 largest positions total 3.38 per... This ETF has about 150 stocks. Let's now compare the two ETFs. Let's consider shorting, and now... I don't want the S&P 500, I want to compare it with the IWM. Exactly, let's update and see the returns of these two.
So, VB is the orange line, IWM is the blue line, and we see that they are very close to each other. In the last year, the one that gave us the best return was VB with 6.7%. IWM had about 5% in the last 5 years. VB was also superior in the last 3 years, and in the last year, as we saw now, it was also superior.
We can't see the 10 years here because it's a paid feature, but at least during the last 5 years, the VB ETF was superior to the IWM ETF from Russell 2000. So this was the comparison, and in a scenario where the Magnificent Seven companies like Apple, Tesla, Microsoft, among others, caused the indexes to explode completely in 2023, Peter Lintes believes that investing in stocks of...
Smaller market capitalization is the way to go. What do you think of this strategy? Tell me in the comments what you think. Do you consider investing in the S&P 500 and Nasdaq and investing in these large companies to still be the smartest way to go, or do you think the smartest way is precisely to invest in these stocks that most investors don't even look at?
This is today's video. If you liked it, don't forget to click the like button, and if you're not subscribed, don't forget to subscribe and activate the bell so you always know when we post a new video. The link to the Rankia newsletter will be in the description. I'll also leave the links to these ETFs from C King Alpa, and that's it, we've reached the end for today. I hope you enjoyed it and see you in the next video.
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