InvestZ Archives | Page 129 of 160

Jun

2023

Guide to Mega Cap Stocks

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Mega cap, or “megacap,” is a term that describes the largest publicly-traded companies, based on their market capitalization. Mega cap stocks typically include industry-leading companies with highly recognizable brands.

Investing in mega cap stocks, along with companies that have a smaller market capitalization, can help build a diversified investment portfolio. Spreading investment dollars across different market caps may allow investors to minimize potential risks. But like any security, mega cap stocks have both pros and cons that investors should consider. Learning more about how they work and what sets them apart from other types of stocks can help you decide whether there’s a place for them in your portfolio.

Market Capitalization, Explained

Mega cap stocks sit at one end of the market capitalization spectrum, representing the very largest companies in the public markets. Market capitalization is a commonly used method for categorizing publicly-traded companies. In simple terms, market capitalization or market cap measures a company’s value, as determined by multiplying the current market price of a single share by the total number of shares outstanding.

For example, say a company’s stock is priced at $50 per share and it has 10 million shares outstanding. Following the formula of $50 x 10,000,000, the company would have a total market capitalization of $500 million.

Most often, companies are assigned to one of three categories, based on their market capitalization as follows:

• Small cap: Market value of $250 million to $2 billion

• Mid cap: Market value of $2 billion to $10 billion

• Large cap: Market value above $10 billion

While most companies fit into one of these three groups, some outliers exist on either end of the spectrum. The smallest of the small cap stocks are microcap stocks, while the largest companies are the mega caps.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Mega Cap Stock Definition

Mega cap stocks have a market capitalization that’s significantly beyond $10 billion required for classification of large cap stocks. Instead, these companies have market capitalizations in the hundreds of billions or even of $1 trillion or more.

There are a handful of companies with market caps of more than $1 trillion, and those companies only passed the trillion-dollar mark in recent years. That said, it’s likely more companies will become mega cap stocks in the years ahead.

10 Companies With the Largest Market Cap

As of June 2023, these are the ten companies with the largest market caps. Note, too, that there isn’t always a direct correlation between market cap and stock price!

1. Apple

Apple, which trades under the market ticker AAPL, has a market cap of $2.9 trillion, and shares trade at more than $185. Apple is a tech company that produces consumer tech goods and software, including the iPhone. Its latest quarterly report (Q2 2023) showed revenue of almost $95 billion.

2. Microsoft

Microsoft trades under the MSFT ticker, and has a market cap of more than $2.5 trillion. Microsoft, like Apple, is a large tech company that creates software and hardware for businesses and consumers. Microsoft shares trade for nearly $340, and its latest revenue numbers tallied nearly $53 billion for the quarter.

3. Alphabet

Yet another large tech company, specializing in software and ad sales, Alphabet (the parent company of Google) has a market cap of more than $1.57 trillion. Alphabet trades under the GOOG ticker (it has numerous share classes), and shares trade for around $124. Its latest quarterly revenue was almost $70 billion.

4. Amazon

Amazon is an ecommerce company that sells just about everything under the sun on its digital platform, as well as offering cloud services to businesses. Amazon trades under the AMZN ticker, and has a market cap of $1.22 trillion, and shares trade for more than $125. Amazon’s latest quarterly revenue was $127 billion.

5. NVIDIA

NVIDIA makes computer chips, and has a market cap of $1.07 trillion, with share prices of around $434. NVIDIA trades under the NVDA ticker, and its most recent quarterly revenue was $7.19 billion.

6. Tesla

Tesla, an electric car maker, is not a mega cap stock, but close. Its market cap is $857 billion, with share prices of more than $270. It trades under the ticker TSLA, and saw revenue of $23.3 billion during Q1 2023.

7. Berkshire Hathaway

Berkshire Hathaway is a conglomerate holding company, meaning that it is involved in many industries, including real estate and insurance. It has many stock classes, but trades under the ticker BRK.A, and is valued at more than $516,000 (its other shares trade for significantly less). Its market cap is nearly $743 billion, and its latest quarterly revenue was more than $85 billion.

8. Meta

Meta is the parent company of Facebook, and trades under the ticker META. Its market cap is $726 billion, and shares trade for more than $283. Revenue for the first quarter of 2023 was almost $28 billion.

9. Visa

Visa is a financial services company, which most recently brought in quarterly revenue of almost $31 billion. Visa trades under the ticker V, and has a market cap of more than $466 billion, with shares trading for more than $227.

10. UnitedHealth Group

UnitedHealth Group is a healthcare and insurance company with a market cap of $437 billion. Shares are trading for nearly $470, and its latest quarterly revenue numbers amounted to $336 billion.

3 Pros of Investing in Mega Cap Stocks

There are several good reasons to consider making mega cap stocks part of your asset allocation strategy.

1. Diversification

Investing across different sectors and market capitalizations spreads out risk, since economic ups and downs may affect smaller, mid-sized and larger companies differently.

2. Stability

Established mega cap companies are among the most stable in the economy and may be better able to withstand a market downturn compared to smaller or newer companies without cash reserves or a solid brand reputation.

3. Dividends

Some mega cap stocks pay dividends to investors since they don’t need to reinvest profits into growth. That can provide an additional stream of income or allow for faster portfolio growth if they’re reinvested.

Cons of Investing in Mega Cap Stocks

While there are some things that make mega cap companies attractive to investors, it’s important to consider the potential downsides:

Limited Upside

Since many mega caps have already done most of their growing, there may be limited space for their share prices to increase.

Perception vs Reality

Market capitalization measures the stock market’s perceived value of a stock, not its intrinsic value. So mega cap status alone shouldn’t be considered a reliable indicator of a company’s fundamentals or financial health.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How To Invest in Mega Caps

If you understand the investment risk and potential rewards that come with mega cap stocks and you’re interested in adding them to your portfolio, there are two ways to do it. You can choose to invest in individual mega cap stocks, or you can put money into an investment fund, such as a mutual fund or an exchange-traded fund (ETF) that holds mega caps.

You can also look at investing in a market index that can give your portfolio exposure to mega cap stocks.

Buying individual stocks allows you to pick and choose which mega caps you want to purchase. But this may require more of a hands-on approach as you’ll need to research individual companies. There are similarities and differences, in that regard, between investing in mega cap and investing in small cap stocks.

Investing in a thematic ETF focused on mega cap stocks may be a simpler way to diversify with larger companies. This allows you to have exposure to more mega cap stocks in your portfolio.

ETFs can be traded on an exchange, just like a stock, allowing for greater liquidity and flexibility than traditional mutual funds. Lower turnover ratios can make ETFs more tax-efficient than regular mutual funds. Depending on which mega cap ETF you choose, you may pay a much lower expense ratio than you would with traditional mutual funds.

Buying Stocks With SoFi

Mega cap stocks refers to stocks that have a market capitalization of more than $10 billion, and in some cases, more than $1 trillion. As of June 2023, there are only a handful of mega cap stocks out there, but several companies may become mega cap stocks in the subsequent years.

Mega cap stocks offer stability and the potential for dividend income, though they may have lower upside than smaller stocks that have more room to grow. The right role for mega cap stocks in your portfolio will depend on your investment goals, risk tolerance, and time horizon.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are examples of mega caps?

Some examples of mega cap stocks include Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN), the first two of which have market caps of more than $2 trillion.

How many mega cap stocks are there in the U.S.?

Mega cap stocks are stocks with share prices of vastly more than $10 billion, and as such, there are many on the market – dozens, in fact. But there are only three or four with market caps of more than $1 trillion.

What is the difference between a large-cap and mega cap?

While mega cap stocks are typically defined as having market caps of more than $10 billion (often more than $200 billion), large-cap stocks have market caps ranging from $2 billion to $10 billion.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Jun

2023

Investing in Retail Stocks

By Stacey Leasca | Growing Wealth, invest, Investing | Comments Off

When a consumer walks into a favorite store and spends money there, they might wonder if they should invest in that brand. Enter: retail stocks–companies that sell everything from clothing, books, computers, homeware, tools, groceries to auto parts.

It may feel like a good idea to invest in retail stocks because we’re familiar with their stores, the products and understand the brand identities.

However, retail investing can actually be tricky, especially in today’s ecosystem. Retail companies have dealt with a lot in recent years: shifting consumer preferences, the rise of online shopping, a slew of store closures, trade wars, a global pandemic that brought about quarantine measures.

Here are some things you need to know about retail stocks before diving into them.

How to Invest in Retail Stocks

First, investors need to check to see if the retail company is public. Being public means shares of the business are available for any investor to buy in the stock market. They can do this by looking up the company’s stock ticker symbol on the internet or via their brokerage account. For those who just want exposure to the industry as a whole, they can find a retail-stock exchange-traded fund, or ETF.

Recommended: What Is an ETF?

Why do retail companies go public? Typically in order to raise additional funds that are used to open more stores, expand overseas, invest in their e-commerce platform, or buy another retail company.

As a stockholder in a retail company, the investor holds a partial ownership, or a share, of the business. The owner of a stock is also entitled to dividends the company may disburse, and benefit from any potential increase in its share price. They also have the right to participate in shareholder votes.

Being a retail investor isn’t for the faint of heart. It takes a lot of due diligence. Investors should read quarterly earnings reports the company makes, monitor for any additional announcements the company makes related to company performance or new products, and pay attention to management changes like a new CEO or CMO.

Recommended: Reading an Earnings Report

It also takes an investor who isn’t afraid of a little volatility. Retail stocks can be particularly turbulent when reporting earnings for the back-to-school or holiday seasons–when many companies make a majority of their sales.

Changes in the Retail Industry

Remember back in the day when the mall was the place everyone went to hang out or go shopping? That reality has shifted radically with the advent of ecommerce. Consumers have increasingly migrated online to make their purchases, and retail companies have had to change alongside them.

Take holiday spending, the most important season for many retailers. Online spending has continued to outpace in-store spending, with the gap widening in recent years due to mobile spending.

The shift also accelerated as the Covid-19 pandemic caused consumers to avoid crowds and buy more through web purchases, according to a 2020 Deloitte survey . The average spend online in 2020 was $892 versus $390 in person, the survey shows.

Question: What percentage of your total holiday budget do you expect to spend…

	2015	2016	2017	2018	2019	2020
Online?	51%	50%	55%	57%	59%	64%
In-store?	46%	45%	38%	36%	36%	28%

Source: Deloitte

The e-commerce revolution has changed the stores along Main Street or malls into more of a marketing tool, rather than a first point of sale. Over the last few decades, stores have had to adapt to create exclusive consumer experiences only found in-store.

Those that couldn’t keep up with the changing times had to shut their doors. According to research and advisory group Coresight Research, a record 10,000 stores could close in the U.S. in 2021. That would mark a 14% jump in total closures from 2020. Coresight also predicted about 4,000 store openings in 2021, but mainly by discount grocers and dollar-chain stores.

Looking at Retail Stock Metrics

Here are some ways investors can evaluate whether to invest in a public retail company:

1. Visit a few physical locations. This way, an investor can get a sense of what’s happening on the ground. Is the store selling timely merchandise? Is the store well lit and laid out? Is there a lot of foot traffic? All of these are important ways an investor can try to gauge a company’s health.
2. Visit the store’s online platform. If the store’s e-commerce operation seems strong, it is easy to navigate and offers customer service. This, too, points to the good health of a company.
3. Next, it’s time to dig deeper into the company’s finances. Some measures that can be particularly helpful to retail investors include comparable store sales–also known as same-store sales. These are sales trends of stores that have been open at least one year.
4. Also examine margins, or how much the revenues a company makes after subtracting the cost of goods sold (COGS), and inventories, or how much in goods the company has stocked. Too much inventory can signal slow sales, while too little may be a sign of operational or production issues down the road. These numbers may fluctuate depending on the season.
5. Use traditional valuation metrics, such as price-to-earnings ratio or price-to-sales ratio. Public retail companies are required to report net income and revenue figures, which investors can use to gauge how expensive or cheap the shares are trading at.
6. Pay attention to broader industry trends by looking at earnings of competitors or changes in e-commerce trends. The National Retail Federation (NRF) could also be a good resource for information.

Possible Risks of Investing in a Retail Stock

Like all investments, retail stocks can come with risks. Take the global Covid-19 pandemic, which led to a quarantine across many cities in the world in 2020, causing consumers to be stuck at home and be wary of visiting stores.

Here are some of the other ways the industry can be vulnerable:

• Retail stocks can be highly cyclical, or tied to economic conditions. In a recession, non-essential purchases may be the first to go for many consumers and may cause an otherwise healthy retail store to sink. Investors may benefit from balancing their portfolio with non-cyclical companies, like utility, telephone or health-care stocks.

Recommended: Why Portfolio Diversification Matters

• Retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain.
• Retail stocks are also often at risk of consolidation. The retail industry is shrinking in some ways, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.

The Takeaway

Retail businesses can be volatile stock investments, going up and down with the seasons, along with changes in consumer confidence. Furthermore, the e-commerce and mobile phone revolution has added pressures to the retail financial landscape.

Investing in retail stocks involves keeping tabs on how brands are dealing with shutting malls, building digital platforms and changing expectations among consumers. Investors can also benefit from understanding more retail-specific metrics like same-store sales, margins and inventories. They can also use traditional valuation measures like P/E or P/S ratios.

It takes time and research to invest in retail stocks. With SoFi Invest®’s Active Investing platform, investors can pick and monitor the retail companies they’d like to be shareholders of. If a particular company’s price is outside what an investor can afford, they may be able to buy fractional shares, or stock bits of a whole stock, through SoFi’s Stock Bits offering.

Try trading Stock Bits on SoFi Invest today.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Jun

2023

25+ Potential Ways to Invest in a Carbon-free Future

27 Potential Ways to Invest in a Carbon-free Future

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Impact investing and socially responsible investing has been growing in popularity in recent years, and will continue to grow for the foreseeable future.

Investing in a carbon-free future is one of the most powerful ways for individuals to help restore the climate. Studies have shown that investing in climate mitigation and adaptation now will prevent trillions of dollars in future losses from disaster relief, GDP decreases, and property losses, and it will cost far less to act now than to deal with future damages.

Another reason to start investing in a carbon-free future now: Since there will be a worldwide focus on the transition to a carbon-free economy in the coming years and decades, some investors might consider investing in green stocks to be one way to build a strong long-term portfolio. As with all investing, it’s essential to carefully consider the risks involved in your chosen investment strategies. Some, all, or none of the below strategies may be appropriate for you.

How Carbon Impacts Our Planet

Current carbon dioxide (CO2) levels in the atmosphere are higher than they have been in at least 800,000 years, and likely higher than they have been in the past 3 million years.

Human activities ranging from automobile use and building construction to agriculture results in greenhouse gas emissions. Over millions of years prior to the Industrial Revolution, carbon was removed from the atmosphere naturally through plant photosynthesis and other processes—but by fossil fuels like coal and oil, humans have put that carbon back into the atmosphere in just a few hundred years. Once emitted, that CO2 stays in the air for centuries.

Changing the concentration of greenhouse gases in the atmosphere changes the Earth’s carbon cycles and results in global climate change. Some effects of climate change are already visible: rising sea levels, more intense hurricanes and fires, disappearing glaciers, and more. Around half of the CO2 emitted since 1850 is still in the atmosphere, and the rest of it is in the oceans causing ocean acidification, which interferes with the ability of marine life to grow skeletons and shells.

Currently, CO2 emissions continue to increase yearly—so it’s just as important for us to scale up the removal of CO2 from the atmosphere as it is to continue working on reducing emissions.

There are ways companies can do construction, agriculture, and all other industrial activity without emitting greenhouse gases into the atmosphere, but scaling up these solutions will require a massive amount of investment. That’s where individual investors can make a difference—by putting money behind companies that are working to create a carbon-free planet.

Climate-Friendly Industries and Companies to Invest In

Ready to make a difference by supporting climate visionaries? Here are 25+ ways to invest in a carbon-free future.

1. Carbon Offsets

Individuals and companies can purchase carbon offsets to zero out their carbon emissions. How they work: You can calculate your estimated emissions from air or car travel or other activities, and invest in local or international projects that contribute to the reduction of emissions. For instance, an individual could invest in a solar energy project in Africa to offset their annual emissions.

Although carbon offsets are controversial because they don’t directly work to reduce one’s emissions, they do help to build out renewable energy infrastructure, regenerative agriculture, and other important initiatives. They are also helpful for offsetting certain activities that are often unavoidable and have no carbon neutral option, such as flying in a plane.

2. Carbon Credits

Carbon credits give a company the right to emit only a certain amount of carbon dioxide or other greenhouse gases.

They create a cap on the amount of emissions that can occur, and then the right to those emissions can be bought and sold in the market. Caps may be placed on nations, states, companies, or industries.

Carbon credits are controversial because larger companies can afford more credits which they can either use or sell for a profit, and some believe the program may lower the incentive for companies to reduce their emissions.

However, companies may be incentivized to reduce emissions in two different ways:

1. They can sell any extra credits they don’t use, thus making money.
2. Generally, limits are lowered over time, and companies that exceed their limits are fined—therefore, transitioning to lower emissions practices is in their best interest.

Although carbon credits are used by companies, individuals can invest in carbon credits through ETFs, or consider carbon emissions alternative investments.

3. ESG Indices and Impact Investing ETFs

Individuals can invest in ESG (environmental social governance) and impact investing ETFs, which are funds made up of companies focused on socially and environmentally responsible practices. Companies included in these funds may be working on renewable energy, sustainable agriculture, plastics alternatives, or other important areas.

4. Climate and Low-Carbon ETFs

Within the impact investing and ESG investing space, there are ETFs specifically focused on climate change and carbon reduction. These exclude companies that rely on fossil fuels, focusing exclusively on companies deemed as climate-friendly.

5. Carbon Capture, Sequestration, and Storage

There are many ways that carbon can be removed from the atmosphere, including through trees and other plants, or by machinery. CO2 can also be captured at the source of emission before it is released into the atmosphere. Once captured, the carbon needs to be stored in the ground or in long-lasting products, so it doesn’t get leaked into the air. Interested investors might want to consider buying stocks in companies that sequester millions of tons of CO2 each year.

6. Products and Materials Made from Captured Carbon

Once removed from the atmosphere, carbon can be used to make many products and materials, including carbon fiber, graphene, and cement. The construction industry is one of the biggest emitters of carbon dioxide, so replacing standard materials with ones made from sequestered CO2 would have a huge impact. All of these materials industries are poised to see huge growth in the coming years, and investing in them helps promote market growth, which can lower the cost of materials and make them more accessible to customers.

7. Tree-Planting Companies and Sustainable Forestry

The business of planting trees is growing. Newer tree planting companies are currently private, but investors can buy stocks, REITs (Real Estate Investment Trusts) and ETFs in companies that practice sustainable forestry and land management, as well as companies that allow investors to purchase a tree.

8. Regenerative Agriculture

The way the majority of agriculture is currently practiced worldwide depletes the soil and land over time. This not only makes it harder to grow food, it also decreases the amount of CO2 that gets removed from the atmosphere and stored in the soil. But with regenerative agricultural practices, the quality of soil improves over time. Spreading the knowledge and use of regenerative farming is extremely important to both food security and greenhouse gas management. Individuals can invest in regenerative agriculture through REITs, or even by investing in individual farms.

9. Green Bonds and Climate Bonds

Green bonds function the same way as other types of bonds, but they are specifically used to raise money to finance projects that have environmental benefits. Projects could include biodiversity, rewilding, renewable energy, clean transportation, and many other areas in the realm of sustainable development. In addition to buying individual bonds, investors can buy into bond funds.

10. Blue Bonds

Blue bonds focus on protecting the oceans by addressing plastic pollution, marine conservation, and more.

11. Refrigerant Management and Alternatives

Refrigerants used for cooling are among the top five highest emitters in the world, according to nonprofit org Project Drawdown . There are several ways to invest in improvements in the refrigerant industry:

•  Invest in alternative refrigerants such as ammonia and captured carbon dioxide.
•  Invest in companies making new types of cooling devices.
•  Invest in refrigerant management companies that reclaim refrigerants.

Other companies are working to retrofit old buildings and provide new buildings with more efficient HVAC systems.

12. Plant-based Foods

Raising livestock for food has a huge environmental footprint: It leads to huge amounts of deforestation, and cows emit methane when they burp, which is a much stronger greenhouse gas than CO2. Raising cows also uses a lot of water, transportation, chemicals, and energy. Replacing meat and materials with plant-based options can significantly reduce emissions and resource use.

13. Food Waste Solutions

Food waste in landfills does not biodegrade naturally—instead it gets buried under more layers of refuse and biodegrades anaerobically, emitting greenhouse gases into the atmosphere for centuries. Landfills are one of the biggest contributors to global emissions, with food waste contributing 8% of greenhouse gas emissions worldwide.

Some companies are heavily investing in waste-to-energy and landfill gas-to-energy facilities, which turn landfill waste into a useful energy source—essentially making products out of food ingredients and byproducts that would otherwise have gone to waste. One has developed a promising food waste recycling unit that could help reduce the amount of waste that sits in landfills as well.

14. Biodiversity and Conservation

Protecting biodiversity is key to creating a carbon-free future. Biodiversity includes crucial forest and ocean ecosystems that sequester and store carbon while also maintaining a planetary balance of nutrient and food cycles.

Interest in biodiversity investments has been growing, and there is even an ETF focused on habitat preservation.

15. Sustainable Aquaculture

The demand for fish rises every year, in part because eating fish is better for the planet and emissions than eating livestock. But a lot of work goes into making sure fishing is done sustainably to avoid overfishing and species depletion, and prevent widespread disease and wasted seafood. Investors may choose to support sustainable aquaculture by seeking out new and established businesses in the industry, or by investing in ETFs that include companies involved in responsible use and protection of ocean resources.

16. Green Building Materials

Creating construction materials such as steel and concrete results in a significant amount of CO2 emissions. There is currently a race in the materials industry to develop new materials and improve the processes of making existing ones. Both new and established businesses are part of this race. Besides steel and concrete, other key building materials that can contribute to a carbon-free future include bamboo and hemp.

17. Water

Clean water systems are essential to the health of the planet and human life. As the population grows, there will be more demand for water, which requires increased infrastructure and management. Proper water management can have a huge impact on emissions as well.

There are three main ways for individuals to invest in the future of water. One is to invest in public water stocks such as water utilities, equipment, metering, and services companies. Another is to invest in water ETFs or in ESG funds that focus on water.

18. Green Shipping

The transportation of goods around the globe is a huge contributor to greenhouse gas emissions. In order to improve shipping practices, a massive shift is underway. The future of green shipping includes battery-operated vessels, carbon-neutral shipping, and wind-powered ships. Other technologies that play into green shipping including self-driving vehicle technology and AI. Investing in any of these areas can help the shift towards a carbon-free future.

19. Electric cars and bicycles

The use of electric cars and bicycles can significantly reduce the amount of CO2 emissions that go into the atmosphere. Interested investors might want to research stocks in the electric vehicle, charging, and battery space.

20. Telepresence

As has been proven during the COVID-19 pandemic, the reduction of work-related travel can significantly reduce global CO2 emissions. Video conferencing and telepresence tools continue to improve over time, which reduces the need for people to fly and drive to different locations for business meetings. Investing in companies working on these technologies may help solidify and continue the trend of remote work.

21. Bioplastics

Bioplastics include plastics that are completely biodegradable as well as plastics that are made partially or entirely out of biological matter. Currently bioplastics make up a very small portion of global plastic use, but increasing their use can greatly help to reduce waste and emissions.

22. Energy Storage

One of the biggest hurdles to scaling up renewable energy is creating the technology and infrastructure to store the energy, as well as reducing the costs of energy storage to make it more accessible. Investing in energy storage can help develop and improve the industry to help hasten the transition away from fossil fuels.

23. Green Building

Making the construction industry carbon-free goes beyond the creation and use of green building materials to include LED lighting, smart thermostats, smart glass, and more. These technologies can drastically reduce the energy used in buildings. There are many companies to invest in in the green building industry, as well as ETFs that include green building stocks.

24. Recycling and Waste Management

As the world’s population grows and becomes more urbanized, waste management and recycling will become even more important. Preventing waste from going to landfills is key to reducing emissions, as is the reuse of materials. For interested investors, there are many companies to invest in within waste management.

25. Sustainable Food

Food production is heavily resource-intensive, with many moving parts. In addition to companies working to improve soil health, refrigeration, plant-based foods, and food waste, there are also companies working on sustainable fertilizers, pesticides, irrigation, seeds, and other areas. One way to invest in sustainable food is through an ETF.

26. Sustainable Fashion

The fashion industry is one of the world’s worst polluters. In fact, the fashion industry produces about 10% of global carbon emissions, in addition to its huge water use and polluting the ocean with plastics. Several of the world’s most well-known sustainable fashion brands are privately held, but increasingly, public companies are also making big strides in sustainability. Individuals can also support sustainable fashion by investing in material companies and agricultural producers that make bioplastics, bamboo, hemp, and sustainable leather alternatives.

27. Renewable and Alternative Energy

Energy is another important area to invest in for a carbon-free future. Within the renewable and alternative energy space, individuals can invest in companies working on wind, solar, biomass, hydrogen, geothermal, nuclear, or hydropower. There are countless companies and ETFs to invest in within renewable energy.

The Takeaway

Every industry around the world needs to make big shifts in the coming years to reduce emissions and build a carbon-free future. As an individual, investors can make their voices and their choices heard with their dollars, by investing in companies leading the way in sustainability.

Looking to start building your investment portfolio? SoFi Invest® is a great place to start. Using the investing platform, you can research and track stocks and ETFs, view your financial information in one simple dashboard, and buy and sell stocks right from your phone.

Find out how to get started with SoFi Invest.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Jun

2023

What Are Dividend ETFs?

By Austin Kilham | Growing Wealth, Investing | No Comments

Low yields from bond investments across the globe have left investors seeking other sources of income, and dividend stocks have often been where such investors have turned.

The need for income-paying dividend stocks, as well as the expansion of the market for exchange-traded funds (ETFs), have made dividend ETFs increasingly popular.

With dividend ETFs, not only do shareholders have exposure to potential gains in share price, they may be able to line their pockets with additional income in the form of quarterly payouts. Plus, even if share prices aren’t roaring along, these dividends can still provide a little income boost.

Let’s dig deeper into dividend ETFs.

ETFs Basics

An ETF is a fund that allows individuals to invest in a diversified basket of investments, such as stocks, bonds, and other assets.

Most ETFs track some sort of index, such as the S&P 500, which itself tracks the performance of the 500 largest U.S. stocks. Their holdings primarily mirror the assets included in the index. That said, there may be a small percentage of the portfolio that may lie outside the fund and vary a little bit depending on fund manager choices.

As the name suggests, “exchange-traded funds” are traded in real time on exchanges, such as the New York Stock Exchange or Nasdaq. The price of the ETF fluctuates throughout the day, and these funds can be bought and sold all day.

This is an important distinction from how mutual funds work, which also allow individuals to invest in a basket of investments. Mutual fund trading is done once per day at the end of the trading day.

Another important difference is that ETFs typically have lower fees than mutual funds. Because ETFs that track an index are usually passively managed, they don’t require a lot of intervention and work from fund managers. Less time and energy from fund managers translates into lower fees that end up being passed on to investors.

How Dividend ETFs Work

A dividend ETF works much the same as a regular ETF, though they usually track part or all of a dividend stock index. For example, a dividend ETF might track the Dow Jones U.S. Select Dividend Index , which consists of 100 dividend-paying stocks.

Dividend stocks are securities that pay a portion of company profits out to shareholders. Those dividends are usually paid on a fixed schedule. The process involves three important dates: the declaration date, the date of record, and the payment date.

The declaration date is the day the board of directors announces that it will pay a dividend. The date of record, also known as the ex-dividend date, is the day shareholders “of record” are entitled to the dividend. And finally, the payment date is the actual day that the dividend is paid out. Dividends are usually distributed to shareholders in the form of cash.

Do ETFs Pay Dividends?

Dividend ETFs collect the dividend payments from their underlying stocks and make distributions to the ETF shareholders. The process of payment from a dividend ETFs mirrors that of single dividend stocks. There is a record date, ex-dividend date, and a payment date.

That said, the ETF’s schedule may be different from the schedules followed by its underlying stocks. Dividend ETFs usually make payments according to a regular schedule, which is described in the fund’s prospectus and is publicly available.

Recommended: What are Dividends and How Do They Work?

Types of Dividends

Qualified dividends are those that can be taxed at the capital gains rate. The capital gains rate then depends on the investor’s modified adjusted gross income (MAGI). This is also known as the preferential rate.

In contrast, unqualified dividends are taxed at income tax rates, which are generally higher than capital gains tax rates.

The Internal Revenue Service (IRS) requires that investors hold shares for more than 60 days during a 121-day period. The period starts 60 days before the ex-dividend date.

How Dividend ETFs Are Taxed

ETFs may also be more tax efficient than other similar investments. That’s because they’re passive investments with little turnover in the holdings. The process of creating and redeeming ETF shares are also not subject to capital gains taxes on any individual security within the fund.

Dividend ETFs are a little bit more complicated when it comes to taxes due to the way dividends are taxed by the IRS. There’s no escaping tax on dividends. Shareholder dividends are taxable in the year that they are received whether they are paid in cash or whether they are reinvested. The first thing to pay attention to is whether you are receiving qualified dividends.

The bottom line: Rules for dividend taxation may be complicated, but there are no special rules you have to remember that differentiate how dividends from ETFs are taxed versus those from regular dividend stocks. What matters most is whether those dividends are qualified or unqualified in the eyes of the IRS.

Types of Dividend ETFs

There are hundreds of dividend ETFs that can track all sorts of indexes. We’ve already mentioned one that tracks the Dow Jones U.S. Select Dividend Index of U.S. stocks. Others may track global indexes, while some may target specific indexes by country.

Still others will target equities of specific sizes, or styles, or sector. Some track bond indexes of varying risk. And others target real estate or currency or alternatives. The variety can be dizzying, but investors can take a look at what’s available by looking at the ETF Database directory.

The dividend options on offer leave investors with plenty to choose from. Here’s a closer look at just a few categories of dividend ETFs that investors may encounter:

Dividend Growth ETFs

A company that’s steadily growing its profits should theoretically be able to offer higher dividends in the future. That’s the reasoning behind dividend growth ETFs, which target companies that show increasing profits and sales.

Dividend Value ETFs

Value stocks, like those targeted by dividend value ETFs, are those that operate in relatively stable industries but are priced cheaply compared to the potential value of the company.

They typically have a low price-to-earnings ratio. The idea is that the company may experience a future jump in share price as investors catch on to the company’s true value. Shares inside the ETFs could provide a nice boost in price in addition to the dividends they provide.

Recommended: Value vs. Growth Stocks: What to Know

High Dividend Yield ETFs

This category of ETFs goes after stocks that produce high dividend yields. But here’s the rub: While the payout for these stocks may be big, it doesn’t necessarily mean that the stock will grow particularly fast. In other words, you may be trading swift share price growth for high dividend yields.

Also, as stock price goes down, yield goes up. It’s counterintuitive, but the way this math works out may actually be masking the fact that you’re losing money on the price of the stock. Investors could potentially combat this by looking for ETFs that invest in stocks that at least keep pace with the market long-term.

Some dividend ETFs target the so-called “Dogs of the Dow”. The Dow is an index that comprises the 30 largest U.S. industrial stocks. The “dogs” are the 10 highest-paying dividend stocks within this index, yet they also tend to be the lowest performers when it comes to price gain—hence their slightly unflattering moniker.

One example of a high dividend yield ETF is the Vanguard high Dividend Yield ETF (VYM), which has about $36 billion in assets.

Reinvesting Dividends

Reinvesting dividends is the process of using the income collected from a holding and immediately buying more shares of the stock or ETF that pays out the dividend. The practice is commonly known as dividend-reinvestment plans (DRIP).

The Takeaway

ETFs provide a built-in way to add diversification through the basket of stocks they invest in. Even so, you may still want to consider how the ETF will fit into your overall plan.

When choosing a dividend ETF, you might consider your overall portfolio allocation and diversification. Your portfolio may be built based on three factors: your goals, your time horizon, and your risk tolerance. Adding an investment without considering these factors could throw off your careful plans.

You can also find out quite a bit of information about a fund from its prospectus, which is filed with the Securities and Exchange Commission (SEC) and is available to every member of the public. The prospectus can give you information such as past returns, as well as what kinds of fees you can expect to pay when you invest in the fund. You should also be able to learn more about the fund’s investment strategy.

Once you’ve decided on a fund and you want to purchase shares, you could do so inside an Active Investing account with SoFi. You can buy and sell your own stocks, all with no commission and no account minimums. You’ll also have access to financial advisors who can help you figure out the options to suit your needs. To learn more about how to build your investment portfolio, visit SoFi Invest®.

Download the SoFi Invest mobile app today.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Jun

2023

Lessons From the Dotcom Bubble

By Kim Franke-Folstad | Financial Independence, invest, Terminology | Comments Off

If you’ve been watching this year’s tech stock rollercoaster with an odd sense of déjà vu, you’re not alone.

Members of the market-watching media have noted the strong parallels between today’s tech sector and what went down when the dot-com bubble burst back in 2000. And those similarities—rising stock valuations, an increase in initial public offerings (IPOs), and a focus on buzz over basics—have some experts pondering if history is repeating.

If you—or your parents, or your grandparents—were affected by the 2000 dot-com crash, you may be wondering if there’s something you can do to help protect your portfolio this time around.

Here are five lessons from the dot-com bubble and the financial crisis that followed.

What Caused the Dotcom Bubble, and Why Did It Burst?

Back in the mid-1990s, investors fell in love with all things internet-related. Dot-com and other tech stocks soared. The number of tech IPOs spiked. One company, theGlobe.com Inc., rose 606% in its first day of trading in November 1998.

Venture capitalists poured money into tech and internet start-ups. And enthusiastic investors—often drawn by the hype instead of the fundamentals—kept buying shares in companies with significant challenges, trusting they’d make it big later.

But that didn’t happen. Many of those exciting new companies with optimistically valued stocks weren’t turning a profit. And as companies ran through their money, and fresh sources of capital dried up, the buzz turned to disillusionment. Insiders and more-informed investors started selling positions. And average investors, many of whom got in later than the smart money, suffered losses.

The tech-heavy Nasdaq index had climbed from under 1,000 to above 5,000 between 1995 to 2000. The gauge however slid from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct. 4, 2002. Many wildly popular dotcom companies (including Kozmo.com, eToys.com, and Excite) went bust. Equities entered a bear market. And the Nasdaq didn’t return to its peak until 2015.

What Can Investors Today Learn from the Past?

Every investment carries some risk—and volatility for stocks is generally known to be higher than for other asset classes, such as bonds or CDs. But there are strategies that can help investors manage that risk. Here are some lessons:

1. Diversification Matters

One of the most established strategies for protecting a portfolio is to diversify into different market sectors and asset classes. In other words, don’t put all your eggs in one basket.

It may be tempting to go all-in on the latest hot stock, or to invest in a sector you’re intrigued by or think you know something about. But if that stock or sector tanks, as tech did in 2000, you could lose big.

Allocating across assets may reduce your vulnerability because your money is distributed across areas that aren’t likely to react in the same way to the same event.

Diversifying your portfolio won’t necessarily ensure a profit or guarantee against loss. And you might not be able to brag about your big score. Over time though, and with a steady influx of money into your account, you’ll likely have the opportunity to grow your portfolio while experiencing fewer gut-wrenching bumps along the way.

2. Ignoring Investing Basics Can Have Consequences

Even as the stock market began its meltdown in 2000, individual investors—caught up in the rush to riches—continued to dump money into equity funds. And many failed to do their homework and research the stocks they were buying.

Prices didn’t always reflect underlying business performance. Most of the new public companies weren’t profitable, but investors ignored poor fundamentals and increasing warnings about overvalued prices. In a December 1996 speech, then Federal Reserve Chairman Alan Greenspan warned that “irrational exuberance” could “unduly escalate asset values.” Still, the behavior continued for years.

When Greenspan eventually tightened up U.S. monetary policy in the spring of 2000, the reaction was swift. Without the capital they needed to continue to grow, companies began to fail. The bubble popped and a bear market followed.

From 1999 to 2000, shares of Priceline Inc., the name-your-own-price travel booking site, plunged 98%. Just a couple months after its IPO in 2000, the sassy sock puppet from Pets.com was silenced when the company folded and sold its assets. Even Amazon.com’s shares suffered, losing 90% of their value from 1999 to 2001.

And it wasn’t just day traders who were losing money. A Vanguard study showed that by the end of 2002, 70% of 401(k)s had lost at least one-fifth of their value, and 45% had lost more than one-fifth.

Valuing a Stock

There are many different ways to analyze a stock you’re interested in—with technical, quantitative, and qualitative analysis, and by asking questions about red flags. It can help in determining whether a company is undervalued or overvalued.

Even if you’re familiar with what a company does, and the products and services it offers, it can help to look deeper. If you don’t have the time to do your due diligence—to look at price-to-earnings ratios, business models, and industry trends—you may want to work with a professional who can help you understand the pros and cons of investing in certain businesses.

3. Momentum Is Tricky

Momentum trading when done correctly can be profitable in a relatively short amount of time—and successful momentum traders can turn out profits on a weekly or daily basis. But it can take discipline to get in, get your profit and get out.

Tech stocks rallied in the late 1990s because the internet was new and everybody wanted a piece of the next big thing. But when the reality set in that some of those dot-com darlings weren’t going to make it, and others would take years to turn a profit, the momentum faded. Investors who got in late or held on too long—out of greed or panic or stubbornness—came up empty-handed.

Identifying a potential bubble is tough enough, and it’s only the first step in avoiding the fallout should it eventually burst. Determining when that will happen can be far more challenging. If day-trading strategies and short-term investing are your thing, you may want to pay attention to the trends and your own gut, and get out when they tell you it’s time.

4. History May Repeat, But It Doesn’t Clone

Sure, there are similarities between what’s happening with today’s tech sector and the dot-com bubble that popped in 2000. But the situations are not exactly the same.

For one thing, investors today may have a better grip on what the Internet is, and how long it can take to develop a new idea or company. Some stock valuations today are, indeed, stretched but not as stretched as they were during the dot-com bubble.

And though a strong recovery from the Covid-19 recession could prompt the Fed to cool things down in the future, Fed Chair Jerome Powell has said the central bank is in no hurry to raise benchmark short-term interest rates or to begin reducing its $120 billion in monthly bond payments used to stimulate the economy.

So though it can be useful to look at past events for investing insight, it’s also important to look at stock prices in the context of the current economy.

5. You Can’t Always Predict a Downturn, But You Can Prepare

The dot-com stock-market crash hit some investors hard—so hard that many gave up on the stock market completely.

That’s not uncommon. Investors’ decisions are often driven by emotion over logic. But the result was that those angry and fearful investors lost out on an 11-year bull market. You don’t have to look at every asset bubble or market downturn as a signal to run for the hills. Also, if the market decline is followed by a rally, you could miss out.

One strategy—along with diversifying your portfolio—may be to keep a small percentage of cash in your investment or savings account. That way you’ll have protected at least a portion of your money, and you’ll be set up to take advantage of any new opportunities and bargains that might emerge if the stock market does go south.

Investors should also really look at a company’s fundamentals as well. Does a business make sense? Does it seem like they can grow their sales and keep costs low? Who are the competitors? Do you trust the CEO and management? After deep research into these topics, if the company is still attractive to you, then it could make sense to hang on to at least some of the shares.

If you’re a long-term investor who’s purchased shares in strong, healthy companies, those stocks could very well rebound. But this is an incredibly difficult process that even seasoned investors can get wrong.

The Takeaway

Asset bubbles like the dot-com bubble can have different causes, but the thing they tend to have in common is that investors’ extreme enthusiasm leads them to throw caution to the wind.

In the late-‘90s and early-2000s, that “irrational exuberance” led investors to buy overpriced shares in internet companies with the expectation that they couldn’t lose. And when they did lose, the dot-com craze turned into a dot-com crash. Investors who thought they had a piece of the next big thing lost money instead.

Could it happen again? Unfortunately, there’s really no way to know when an asset bubble will burst or how severe the fallout might be. But a diversified portfolio can offer some protection. So can paying attention to investing basics and doing your homework before putting money into a certain stock. And it never hurts to ask for help.

With a SoFi Invest online brokerage account, investors can diversify their portfolio by putting money into stocks, ETFs or partial stocks called Fractional Shares. Do-it-yourself investors can trade on the Active Investing platform. Investors who prefer a more hands-off approach can have their portfolio managed for them with Automated Investing. And members can rely on SoFi’s educational resources and professional advisors for help.

Check out SoFi Invest today.

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