Building your kids’ college fund is serious business, especially as education costs are skyrocketing. Tuition and fees for the average student are $11,000 annually for in-state public university students and $38,000 each year at private institutions. It’s reasonable to expect those costs to rise, too. Those numbers might trigger dread for parents, so it’s important to come up with a plan to meet the challenge. The most important things you can do are:
Save systematically and aggressively, and
Identify investments that maximize long-term growth without taking on too much risk.
Luckily, there are highly targeted ETFs out there that can deliver on the second part.
Building your investments around megatrends is a great way to maximize long-term growth. It’s tough to know where any single company will stand 10 years from now, especially if we are considering businesses at the center of disruption. It’s much easier to identify a handful of emerging forces that are almost certain to shape the global economy over the foreseeable future.
For example, there are a lot of variables that will determine the competitive landscape in artificial intelligence in 2030. However, we can be confident that AI, data analytics, automation, robotics, and cloud computing will all play an increasingly important role in business, regardless of which companies are the largest financial beneficiaries of those developments. Global demographic trends are also relatively easy to predict far in advance. We can look at birth rates and macroeconomic data to recognize that it’s almost inevitable that there will be a swelling middle class of young families in several emerging economies, which is a recipe for explosive growth.
Latching on to megatrends is a good strategy to ensure impressive long-term growth for your child’s college fund without engaging in excessive risky speculation.
A high-upside tech ETF
The iShares Exponential Technologies ETF (NASDAQ: XT) is a compelling high-upside vehicle with a unique methodology that sets it apart from its peers. This actively managed fund invests in stocks at the forefront of disruptive technology to achieve exceptional growth. The fund holds around 200 different stocks, which are equally weighted and selected to create balance among exponential technology “themes” similar to the megatrends mentioned above.
The ETF managers identify stocks engaged in the development of AI, analytics, 3D printing, nanotech, robotics, distributed networks, fintech, and innovative medicine. Consideration is also given to liquidity, quality scores, and ESG to round out the selection methodology.
The resulting allocation has relatively high exposure to small-cap companies, which enhances growth potential. While tech stocks are obviously highly represented, biotech and medical technology make up 25% of the holdings. The fund also has a sprinkling of industrial and financial stocks. Digital transformation is impacting every industry, so cutting-edge tech is starting to rear its head across all sectors.
Investors may also be enthused by the geographical distribution of this ETF’s holdings. Sixty percent of the portfolio companies are based in the U.S., with Europe and East Asia also highly represented. That diversification helps circumvent any regional economic disruptions that could impact stock performance.
The iShares Exponential Technologies ETF comes with a relatively high 0.47% expense ratio due to the active management and proprietary methodology. That’s obviously not ideal, but price is only an issue in the absence of value. As long as the strategy delivers value in excess of the cost, then the management fees are justified. I believe that’s measurably the case here. Investors should be happy with this ETF’s liquidity — a $7.7 million average daily trading volume and a narrow 0.07% bid-ask spread indicate that it should be inexpensive to trade and easy to unload when the time comes.
The ETF carries a surprisingly low P/E ratio of 30 and a beta of 0.8. This means that investors are gaining exposure to high-growth stocks at a discount, and doing so without taking on meaningful volatility. Volatility and lofty valuations are two of the biggest risks in growth investing, so it’s great news that this vehicle sidesteps those issues.
The back of the envelope
So how can the iShares Exponential Technologies ETF pay for college? The fund has delivered a 171% total return since launching in 2016. That’s a compounding annual rate of return above 18%.
If the fund sustains that rate of return over the next 15 years, then $20,000 would turn into $220,000.
To be fair, it’s highly unlikely that this fund will continue to return 18% each year for the long-term. That would be outstanding growth, with major indexes averaging 7-10% annual returns over the long term. Saving for college probably has to be an ongoing commitment instead of a one-time investment.
Still, if we are looking for a responsible moonshot in the ETF universe, the iShares Exponential Technologies ETF makes a compelling case. It could be a great building block for your college fund.
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