The attorneys general of 36 states and the District of Columbia sue Alphabet‘s (NASDAQ:GOOGL)(NASDAQ:GOOG) Google over its app store. A combination of macrofears drive the day on Wall Street. In this episode of MarketFoolery, Motley Fool analyst Asit Sharma analyzes those stories and discusses the potential role of ETFs for investors.
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This video was recorded on July 8, 2021.
Chris Hill: It’s Thursday, July 8th. Welcome to MarketFoolery. I’m Chris Hill, with me today, Mr. Asit Sharma. Thanks for being here.
Asit Sharma: Thanks, Chris, and thank you for the honorific of mister, makes me sound like some authority. I love it.
Hill: Yeah, you’re growing up you’re an authority, you’re an expert.
Sharma: Finally, it’s taken some time.
Hill: For all of us. We’re going to talk ETFs, absolutely we’re going to talk about the lawsuit against Google. But let’s start with the big picture, I was saying earlier today, this is one of those days when the lead story on Wall Street is fear. I’m not saying it’s unwarranted, you’ve got some countries where COVID cases are rising, that’s certainly true in certain parts of the United States. We got the latest jobless claims data from the Labor Department that was higher than expected throw in the fact that Japan has declared a state of emergency around the Olympics. I’m not transacting off of this fear, but I understand why this is the case today.
Sharma: Yes. I mean, crazy to think, Chris, yesterday, I think the Dow had a record close. Here, we all woke up this morning, things are completely different. Part of this is a larger conversation that investors are having as they look into the mirror, which is what does normalcy look like? Normalcy for the markets, normalcy for the global economy. We’ve got this target for the U.S. Our economic growth this year is supposed to be somewhere between 6.5% and 7%, that’s real growth in GDP coming off of COVID. When we hear things about potential slowdown in global growth, the Delta variant, figuring into the fact that the 10-year treasury dropped to about 1.29% yesterday, which is signaling that maybe growth expectations are slowing down. You take all that together and investors start to second guess these record highs and the fact that the market has been relatively healthy. I have no idea what normalcy looks like, but I know that jolts like this are going to get us to an understanding of what that is over the next few months.
Hill: Well, it also makes me think of something Tom Gardner has said for a long time, which is one of the best ways for investors to increase their holdings increase their chances that their investments are going to pay off, double your time horizon. If you have the ability to think in terms of decades or even years instead of weeks and months, as a lot of professional traders on Wall Street do, that’s going to be to your advantage. Again, I’m not saying any of the things I mentioned at the top of the show aren’t real. But it does strike me as one of those things that if you have a long time horizon as an investor, then hopefully you’re less afraid today.
Sharma: Well, it certainly makes it easier to keep investing. It is a little scary to see markets at all-time highs and so much uncertainty in the air. But if you expand that time horizon out, it gives you some room to be OK with the volatility, to be OK with the fact that the market’s really, doesn’t affect what you’re doing on the ground as investor which is trying to find great companies with long growth horizons that are out there innovating in that global economy and are going to rise over time independent of what the short-term market sentiment reflects.
Hill: You mentioned the Dow hitting a new high yesterday. I think if not yesterday’s than earlier in the week or within the past week, both S&P 500 and the Nasdaq have hit new highs. What’s the buffet line, when the tide goes out and you see who’s been swimming naked? I feel like a corollary is when the market hits new highs. Then you find out who are the people in your life whose income depends on you transacting. Because that’s when the drumbeat gets a little bit louder from people who are saying, “Oh, take some money off the table.” The Nasdaq hit a new high. Take some of that money you’ve been making off big tech stocks and put it to work somewhere else or put it in cash.
Sharma: So true, Chris, and those folks their time to make hay, is days like this. Our time to make hay as investors slow and steady, try to tune those voices out.
Hill: Apple has caught a lot of heat lately for how it runs its app store. I guess the silver lining here is that now Apple has company. Because the Attorneys General of 36 States and the District of Columbia have filed an antitrust lawsuit targeting Google’s App Store, arguing that Google maintains a monopoly for distributing apps for the Android operating system. I’m not a lawyer, but this is one of those situations where I’m having a hard time seeing where the harm is for consumers. I get that if you’re in the business of creating apps, if you are an app developer, maybe this isn’t the greatest situation. But for consumers like you and me, Asit, I would not want to be in the position of having to prove significant consumer harm.
Sharma: It’s true, Chris, it’s hard to see this. I’ll put the arguments this way so this comes as a summation of the argument from the state. Google Play, the Google store has about a 90% market share for apps that are on Android devices, and no other store has more than 5% market share. Now, with that fact, you’ve got this other fact on the side here that Google charges a 30% commission to developers on top of some other transaction fees on its store. Now, there’s a great argument to be made there that looks if that pricing power exists. If app developers are passing on that 30% cost to us as consumers, they might charge that anyway and take it all home. It is always hard to make the argument that the commission fees that Google charges are costing the consumer. If you’re a developer, and Google doesn’t charge those fees and people buy the product at that price then that 30% is yours. I see some difficulty there as well. However, this is a big target that is on Google and Apple is right there beside it. I want to read something from William White, who’s the Senior Director of Public Policy at Google, he said, this was an interview yesterday, I believe, or blog posts, “Android and Google Play provide openness and choice that other platforms simply don’t.” This is firing a little shot at Apple. What that means is that you can circumvent the Google Play Store if you want. There are ways to get apps onto your Android device without having to go through the Google Play Store. Not so with Apple’s iOS system, you’ve basically got to go through Apple’s App Store to get apps on the Apple device, which both companies are charging these commissions to developers, and both are in the cross hairs of some regulation coming up. I think it’s par for the course for these two dominant players in the app ecosystems. I guess to the point of these 34, 36 odd states that have brought the suit, there is no third app store out there of any size. It’s basically two really big fish that are fighting it out in real time, so we continue to watch what happens on these fronts.
Hill: I love it when the big companies just take shots at each other. Like, Alphabet is not behemoth thoughts at all and they are part of their responses like, “Hey, look at them, what are you coming after us to look at Apple, at least we’re not Apple.”
Sharma: Yeah. I loved the little petty pot shots. It brings some color into what are otherwise dry proceedings.
Hill: A reminder because I haven’t mentioned this in a while, if you’re ever looking for more stock ideas and recommendations, if you’re not already a member of our Stock Advisor service, you can check it out. You get stock recommendations every month, you get Best Buys Now, you get a lot and you get 50% off just by being one of the dozens of listeners when you go to stockideas.fool.com.
Our email address is [email protected] We got an email from George […], whose last name I’m almost certainly mispronouncing. I’m sorry about that, George. He writes, “Do you take into account the composition of your funds when you’re looking at individual stocks? Like many fools, I have the big tech names in my portfolio. But if you start to dig into S&P 500 ETFs, or even the Fool 100 Index, you already have a large concentration in these companies. As someone with a 401(k) that does not allow individual stocks and a poor fund selection, I have a large chunk in the standard index ETFs. Just wondering how much you look into the composition of your ETFs in your portfolio when looking at concentration.” It’s a great question, Asit. I have to say, personally, my first big investment was an S&P 500 index fund. I think I compartmentalize how I think about that versus the fact that I own companies like Amazon. A lot of the companies I own shares of are in the S&P 500 index fund. That’s like, I don’t look at it as I’m overweight in that sense. I’ve got my stocks and then I’ve got my S&P 500 index fund.
Sharma: I think it’s a healthy way to think about it, Chris, to compartmentalize a little bit because you want to develop your skills as someone who can pick great stocks and be able to hold them. A lot of times you will find if you play this game long enough, a confluence of companies you really like and companies the rest of the market really, really likes as well. You’ll find some doubling up of position. It’s healthy to compartmentalize so you don’t keep yourself from participating and getting a bit more concentration in a stock like Amazon.com, which hopefully will continue to pay off for you over the long term. To George’s point, it is a great point. We know that a handful of mega tech stocks make up about 40% of the S&P’s market capitalization. What is an investor to do who’s seeking some diversification and trying to avoid specific stock risk by investing in the market only to find that these handful of stocks can propel the market on any given day and over the longer term. Well, one of the things that you can do if you’re really worried about this is look for ETFs that have exactly the same S&P composition. But instead of being capitalization weighted, they’re equal-weighted. There are a few equal-weighted ETFs out there that an investor can look at.
As for our own Fool 100 ETF, I should point out that it has a bit of a deceiving construction. We select the stocks on the Motley Fool subscription services side based on our conviction. But we can’t really run that. That’s the other arm of the business. That’s the asset management side. Then on their side, they have to go with market-weighted capitalizations as well. Even though we pick according to our conviction, that’s the aggregate of our analyst team, our convictions on all these stocks, once it hits an ETF product, it also becomes capitalization-weighted. To George’s point, you get some big names that are driving a lot of the change. I would say the other thing an investor can do is remember there are mid-cap ETFs that you can participate in. There are international ETFs. There’s a whole world of ETFs that can give you a little bit of diversification. I know it sounds ironic to say this outside of the S&P 500 index, which is supposed to be your diversification vehicle.
Hill: No, that’s true, but it is one of those parts of the investing world that doesn’t get as much attention as individual companies do. That makes sense to me just from a business media standpoint. But it’s a great point that a good way to diversify is, if you’re looking for, like, I’m looking for not individual stock, particularly on the international level. If you’re just like, how can I take a basket approach to a region of the world, but I don’t want to pick individual stocks myself? You can do that by the way. You can go the Jason Moser route if I’m going to find four stocks in this category and that’s going to be my basket. But you can also go the ETF route.
Sharma: Yeah. I think it’s a really fun way in fact to learn about other parts of the world that are emerging in terms of investment viability and also some mature markets that we often overlook in our own backyard. You could look for a large cap stock, which has an industrial focus. That might leave out a lot of tech stocks. ETFs give you that ability to play around, to diversify, to learn. I agree with you, Chris, they’re overlooked, and in some ways, they also are a great fund of ideas. One of the best things you can do as an investor who is both diversifying through ETFs and picking your own stocks is to pour through the list of the holdings of every ETF you buy, and look at those top 10 or top 50 holdings that can generate some very interesting ideas. Many times I have looked down one of these holdings list and the third or fourth, fifth biggest holding in ex ETF is a stock I’ve never thought about owning for myself when I do some research and a light bulb goes off, why don’t I own the security on the side here? I think there can be healthy symbiosis between the stocks we’re picking that we just really love and want to have in our portfolio, and those ETFs which give us a little bit more comfortability to sleep at night and provide some ballast in our portfolios.
Hill: Got to watch the fees though. You always want to make sure you know what the fees are. Although that’s another trend in the same way that all these different brokerages over the past 20 years kept lowering their fees until finally there were like, “The hell with it. We’re not going to charge people for trading stocks at all.” We’ve seen the same thing happen with mutual fund fees and ETFs.
Sharma: Chris, you and I are both of a certain age, so I will say no more than that. But [laughs] you remember those net asset value fees used to be assessed. This is back in the days when everyone was buying mutual funds, the closed-end funds that would charge on a sliding scale of 5% if you tried to get out in the first year, and then you had the management fees as well. The industry has come a long, long way in the investor’s favor. No excuse not to look into ETFs. For the most part, the fees are very reasonable these days. We have to give Vanguard, of course, a lot of credit for driving that over the years.
Hill: My favorite, of course, is the 12b-1 fee. Of course, it’s like, oh, it’s an alphanumeric name. It’s like, what is that? It’s like, “That’s the fee we charge and we take the money from that fee and it goes toward marketing this fund.” Like, “I’m paying you to market this fund to someone else? No, thank you.”
Sharma: One that until it was explained to you looked so legit, just by that mysteriousness.
Hill: I looked so official, it’s like a quarter% go into the 12b-1, whatever that is.
Sharma: It had to be something very legit, something that had to do with securities law or the mechanics of operating the fund or some esoteric part of investing that you’re paying for some expertise there, you’re paying for marketing expertise. But that’s how the world works.
Hill: Asit Sharma, great talking to you. Thanks for being here.
Sharma: Always fun, thank you, Chris.
Hill: As always, people on the program may have interest in stocks they talked about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see on Monday.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.