A Beginner's Guide To Investing In Amazon Etfs

Amazon is a strong investment option, with its stock price soaring over the years. There are several ways to invest in the company, including buying shares directly, investing in fractional shares, or purchasing an ETF. Exchange-traded funds (ETFs) are a great way to invest passively in Amazon stock, allowing investors to buy many stocks or bonds at once.

ETFs with notable Amazon exposure include the Fidelity MSCI Consumer Discretionary Index ETF, SPDR Consumer Discretionary Select Sector Fund, Vanguard Consumer Discretionary ETF, VanEck Vectors Retail ETF, and the First Trust DJ Internet Index Fund.

Before investing in Amazon, it is important to do thorough research and analysis, keeping an eye on trends and industry conditions.

Research Amazon's financials

Amazon's financial statements for the first quarter of 2023 show a net income of $3.7 billion, which increased to $4.8 billion in the first quarter of 2024.

The company's revenue in 2023 was $575 billion, and it is on track to overtake Walmart as the world's largest retailer. Amazon's revenue is generated through its e-commerce and cloud computing businesses.

Amazon's financial statements also show that it has been investing heavily in its business, with cash outflows from investing activities of $15.8 billion in the first quarter of 2023. These investments include acquisitions, purchases of property and equipment, and marketable securities.

The company's cash flow from operations was $4.8 billion in the first quarter of 2023, primarily driven by changes in net income and working capital. Amazon's free cash flow, which excludes cash flows from investments and financing activities, was negative $11 billion in the first quarter of 2023.

Amazon's cost of sales increased in the first quarter of 2023 compared to the same period in 2022, primarily due to increased product and shipping costs. The company's shipping costs were $19.9 billion in the first quarter of 2023.

Amazon's technology and content costs, which include research and development expenses, increased in the first quarter of 2023 compared to the same period in 2022. These costs are primarily related to the company's investment in new products and services and its AWS business.

The company's general and administrative expenses also increased in the first quarter of 2023, mainly due to higher payroll expenses.

Amazon's other operating expenses include asset impairments and the amortization of intangible assets.

The company's interest income increased in the first quarter of 2023 compared to the same period in 2022, primarily due to higher prevailing interest rates. Amazon's interest expense also rose during this period, mainly related to debt and finance leases.

Overall, Amazon's financial statements show a profitable and growing business with significant investments in various areas, including technology, content, and acquisitions. The company's free cash flow was negative in the first quarter of 2023, indicating that its cash outflows exceeded its cash inflows during this period.

Understand ETFs

Exchange-traded funds (ETFs) are a basket of securities that can be traded on an exchange just like stocks. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of securities. They can even be designed to track specific investment strategies.

ETFs are bought and sold like common stock on a stock exchange. They are traded and experience price changes throughout the day. This is different from mutual funds, which trade only once a day after the market closes.

ETFs generally hold a collection of stocks, bonds, or other securities in one fund or have exposure to a single stock or bond through a single-security ETF. They are an affordable, potentially tax-efficient way to access a broad range of asset classes.

ETFs let you access a diverse mix of asset classes, including domestic and international stocks, bonds, and commodities. They typically have lower operating expense ratios (OERs) than actively managed mutual funds.

ETFs combine the trading versatility of individual securities with the diversified qualities of mutual funds to meet a variety of investment needs. They are widely considered to be more tax-efficient than actively managed mutual funds for several reasons.

• Index ETFs: These track a market index, such as the S&P 500 or Nasdaq Composite.
• Actively managed ETFs: These are funds managed by professionals to potentially outperform passively managed funds like index ETFs.
• Fixed-income ETFs: These provide exposure to different types of bonds, such as US Treasury, corporate, municipal, international, and high-yield bonds.
• Style ETFs: These focus on a specific investing style (like growth or value) or market capitalization (like large or small), or a combination of investing style and market capitalization, such as large-cap value or small-cap growth.
• Sector and industry ETFs: These invest in stocks in a specific sector of the stock market, like energy, healthcare, or utilities, or in a specific industry within those sectors, like oil, pharmaceuticals, or water.
• Commodity ETFs: These track the price of a commodity, such as timber, oil, or gold.
• Foreign market ETFs: These give exposure to non-US markets and international companies, such as Japan's Nikkei index or Hong Kong's Hang Seng index.
• Inverse ETFs: These profit from a decline in the underlying market or index. However, these types of ETFs are risky and more complex and are generally used by experienced investors for short-term trading objectives.
• Leveraged ETFs: These are considered higher-risk investments and track the price movement of a market, segment of the market, or index by magnitudes, like two or three times the price change, whether up or down. Like inverse ETFs, these types of ETFs are also risky and complex, and you should carefully evaluate your goals and objectives before investing.

Choose a brokerage platform

The easiest way to buy Amazon shares directly is through a brokerage account, which you would have to open if you don't have one already. Examples of popular brokerage platforms include:

• Fidelity
• Vanguard
• TD Ameritrade
• E-Trade
• Merrill Edge
• Robinhood

You can buy shares of Amazon from any brokerage account. If you still need to open one, these are some of the best-rated brokers and trading platforms.

Fidelity, for example, makes it easy to buy stocks. Its website offers a video tutorial and a step-by-step guide. On the order page, you'll fill in all the relevant information, including:

• The number of shares you want to buy or the amount you want to invest to purchase fractional shares
• The ticker symbol (AMZN for Amazon)
• Whether you want to place a limit order or a market order. The Motley Fool recommends using a market order since it guarantees you buy shares immediately at the market price right at that moment.

Once you complete the order page, click the Place Order button and become an Amazon shareholder.

If you want to purchase stock directly in Amazon, without going through a broker, you can do so through the company's Direct Stock Purchase Plan (DSPP). You can participate by opening an account with Computershare, where you can purchase, hold and sell Amazon stock. There are transaction fees for both buying and selling stock, which will vary based on the company stock you're buying or selling.

Diversify your portfolio

Diversifying your portfolio is a crucial aspect of investing. By spreading your investments across various assets, you reduce the risk associated with putting all your eggs in one basket. Here are some ways to diversify your portfolio when investing in Amazon:

Exchange-Traded Funds (ETFs)

ETFs are a popular way to gain exposure to Amazon while also diversifying your investment. ETFs are baskets of securities that trade on an exchange like a stock, and they can hold various investments, including stocks, bonds, commodities, or a combination of these. When you buy shares of an ETF, you own a small portion of each of the underlying investments. This diversification offers several benefits:

• Reduced Risk: By holding multiple investments, ETFs lower the impact of any single investment on your portfolio's performance. If one stock in the ETF underperforms, it may be offset by the gains in other stocks, thus reducing your overall risk.
• Broad Exposure: ETFs often provide exposure to a specific sector, industry, or theme, allowing you to invest in a diversified group of companies with a single purchase. For example, the SPDR Consumer Discretionary Select Sector Fund (XLY) has Amazon as its top holding but also includes other consumer discretionary stocks, providing diversification within that sector.
• Professional Management: ETFs are managed by investment professionals who make decisions about which investments to include and when to buy or sell, taking the burden of individual stock selection off your shoulders.

Some of the best ETFs with notable Amazon exposure include:

• Fidelity MSCI Consumer Discretionary Index ETF (FDIS): With an Amazon weighting of 21.89%price and yield of the MSCI U.S. IMI Consumer Discretionary Index. It has an expense ratio of 0.08% and assets under management of $1.78 billion.
• SPDR Consumer Discretionary Select Sector Fund (XLY): This ETF has an Amazon weighting of 22.68% and tracks the price and yield of the Consumer Discretionary Select Sector Index. It is offered by State Street Global Advisors and has an expense ratio of 0.09%.
• Vanguard Consumer Discretionary ETF (VCR): With an Amazon weighting of 21.67%price and yield of the MSCI US Investable Market Consumer Discretionary 25/50 Index. It has an expense ratio of 0.10% and assets under management of $6.5 billion.
• VanEck Vectors Retail ETF (RTH): This ETF has an Amazon weighting of 19.55% and tracks the price and yield of the MVIS US Listed Retail 25 Index. It has an expense ratio of 0.35% and assets under management of $223.6 million.
• First Trust DJ Internet Index Fund (FDN): While Amazon weighting is slightly lower at 9.17%, FDN provides exposure to the broader internet industry, including other tech giants like Google and Facebook. It tracks the price and yield of the Dow Jones Internet Composite Index and has an expense ratio of 0.51%.

Mutual Funds

Mutual funds are another way to gain exposure to Amazon while diversifying your portfolio. Mutual funds are investment vehicles that pool money from multiple investors to purchase a variety of stocks, bonds, or other securities. Here are some of the top mutual funds that hold Amazon stock:

• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX): VTSAX is Amazon's largest mutual fund holder, with more than 12.10 million shares as of April 30, 2021. Amazon represents 3.40% of the portfolio, and the fund provides broad stock market exposure. It has an expense ratio of 0.04% and a 10-year annualized return of 14.02% as of April 30, 2021.
• Vanguard 500 Index Fund Admiral Shares (VFIAX): As of April 30, 2021, VFIAX is Amazon's second-largest mutual fund holder, with 8.8 million shares. Amazon represents 4.20% of the portfolio. This fund offers exposure to 500 large US corporations across various sectors and has an expense ratio of 0.04%.
• SPDR S&P 500 ETF Trust (SPY): Managed by State Street Global Advisors, SPY is an exchange-traded fund and Amazon's third-largest fund owner. As of May 13, 2021, SPY owned nearly 4.40 million shares of Amazon, representing 3.89% of the total investment. It tracks the S&P 500 index and has an expense ratio of 0.0945%.
• Fidelity 500 Index Fund (FXAIX): FXAIX is Amazon's fifth-largest mutual fund holder, with approximately 4 million shares as of March 31, 2021. Amazon represents 3.90% of the fund, which tracks the S&P 500 Index. It has an extremely low expense ratio of 0.015% and assets under management of $328 billion.

Robo-Advisors

Robo-advisors are automated online investment platforms that create and manage a diversified portfolio of funds for you. Given Amazon's popularity, its stock is often included in robo-advisor portfolios. One such platform is M1 Finance, which allows you to create your own investment portfolio, or "pie," where you can allocate up to 40% to Amazon stock while still maintaining diversification with other major stocks. M1 Finance charges no investment fees, making it an attractive option for cost-conscious investors.

Long-term investment approach

A long-term investment approach is a smart choice for both new and older investors. When it comes to profitable investing, nothing quite matches it.

ETFs are a great way to invest in Amazon passively. They trade like stocks but hold shares of many companies, making them an easy way to gain broad exposure to the entire stock market or a specific stock market sector.

• Fidelity MSCI Consumer Discretionary Index ETF (FDIS): Amazon weighting of 21.89%. Tracks the price and yield of the MSCI U.S. IMI Consumer Discretionary Index. Has an expense ratio of 0.08% and assets under management of $1.78.
• SPDR Consumer Discretionary Select Sector Fund (XLY): Amazon weighting of 22.68%. Tracks the price and yield of the Consumer Discretionary Select Sector Index. Has an expense ratio of 0.09% and assets under management of $19.73 billion.
• Vanguard Consumer Discretionary ETF (VCR): Amazon weighting of 21.67%. Tracks the price and yield of the MSCI US Investable Market Consumer Discretionary 25/50 Index. Has an expense ratio of 0.10% and assets under management of $6.5 billion.
• VanEck Vectors Retail ETF (RTH): Amazon weighting of 19.55%. Tracks the price and yield of MVIS® US Listed Retail 25 Index. Has an expense ratio of 0.35% and assets under management of $223.6 million.
• First Trust DJ Internet Index Fund (FDN): Amazon weighting of 9.17%. Tracks the price and yield of Dow Jones Internet Composite Index. Has an expense ratio of 0.51% and assets under management of $10 billion.

When choosing an ETF for a long-term investment, consider the following:

• Diversification: ETFs offer an unmatched choice of assets, markets, and risk levels. That means there is probably an ETF to match your long-term needs at whatever life stage you are at.
• Cost: ETFs are generally lower in cost than other investment options. The transaction fee – the cost of buying the ETF – is one of the main expenses. In the long run, these savings can make a huge difference.
• Goals: When planning for the future, map out an investment plan that works for different stages of your life. Choose an investment strategy with an appropriate risk and time horizon to meet your goals. For example, a typical retirement investment plan may start out with 70% equities, 20% bonds, and 10% “other”, reflecting a higher appetite for risk when you’re young. As you get closer to retirement, you can lower the risk by increasing the percentage of bonds.
• Patience: Markets can change quickly and unpredictably, but historically, long-term investing has shown potential benefits. Success depends on your ability to balance your portfolio to maximize potential returns and match your risk appetite at each life stage.
• Vanguard S&P 500 ETF (VOO): One of the largest funds by assets among any fund on the market. It's linked to the S&P 500 index of the largest U.S. companies. Has an expense ratio of 0.03%.
• Schwab U.S. Small-Cap ETF (SCHA): Focused on small-cap stocks, with an average market capitalization of about $3.7 billion across roughly 1,750 total holdings. Has an expense ratio of 0.04%.
• IShares Core S&P Mid-Cap ETF (IJH): Focuses on stocks in the middle ground between mega-cap leaders and smaller upstarts. Has an expense ratio of 0.05%.
• Vanguard Information Technology ETF (VGT): The largest technology-specific ETF on Wall Street. Has an expense ratio of 0.10%.
• Vanguard High Dividend Yield ETF (VYM): Prioritizes stable blue-chip stocks with reliable revenue and profits, fuelling reliable dividends. Has an attractive 2.8% dividend yield. Has an expense ratio of 0.06%.
• Vanguard Total International Stock ETF (VXUS): Provides simple and cost-effective international exposure, with more than 8,600 stocks in its portfolio. Has an expense ratio of 0.08%.
• IShares Core U.S. Aggregate Bond ETF (AGG): Provides diversification across asset classes with a portfolio of more than 12,000 "investment-grade" bonds. Has a generous yield of 3.4% over the last 12 months. Has an expense ratio of 0.03%.

Frequently asked questions