From Mutual Funds to ETFs
When I first began getting interested in stocks and the market many years ago, like many investors, I started in mutual funds, which were the most common way to invest in the market at the time.
But even back then, funds had only moderate appeal—you were basically putting your money into something you had no control over, a vehicle that owned hundreds of different stocks, and which, in most cases, you had to hold onto for at least a month or two to avoid being charged a penalty fee.
Today, that’s all changed thanks to exchange-traded funds (ETFs), which allow you to trade the overall market, entire sectors, alternative instruments (like commodities) and more, just like a stock. Their appeal has been so strong that they’ve attracted more than $2.5 trillion away from mutual funds!
Of course, I’m 100% dedicated to making money in individual stocks, which offer far more upside than the overall market. But I’m writing about ETFs today for two reasons.
Two Reasons to Consider ETFs Today
First, the market’s tight action of the past few weeks—moving sideways on light volume—has set up many enticing charts among various indexes and sectors. And now we’re seeing the market and many sectors lift out of those tight consolidations, offering some lower-risk entry points.
And second, with earnings season now underway, ETFs can reduce your risk compared to a stock that could blow up because it misses analysts’ estimates by a penny per share.
So I thought now would be a good time to highlight the five best ETFs to buy today or, preferably, as soon as they resume their advance (ideally with the overall market). They’re solid, lower-risk vehicles to consider.
In no particular order …
Five ETFs that Look Buyable Today
I’ll start with the one ETF I own in Cabot Growth Investor—the ProShares Ultra S&P 500 Fund (SSO), which simply moves about twice the S&P 500 every day (percentage-wise), up or down. (If you can’t trade leveraged funds at your brokerage, you can use the SPDR S&P 500 Fund (SPY) instead.) As I’ve written numerous times in the past few months, there are many reasons (big breakout, tight price action, blast-off signals in July, etc.) to believe that the overall market has begun a longer-term uptrend following nearly two years of tedious, back-and-forth action. If that’s the case, owning a leveraged long fund could be an “easy” (it’s never easy, but you know what I mean) way to make good money as the index pushes higher. With SSO just breaking out from its five-plus-week range, you could buy some around here with a stop in the 75 to 76 range.
Financial SPDR (XLF): You’ve likely heard all the potential positives about financial stocks from me and other Cabot analysts in recent weeks; suffice it to say that the prospect of less regulations (including a possible rewrite of the Dodd-Frank bill later this year), higher interest rates and a steeper yield curve (boosting interest income and margins), an overall accelerating economy and the prospect of higher dividends and share buybacks could kick banks out of their multi-year funk. The XLF ETF built a huge base from mid-2015 through November 2016, then exploded higher post-election. It’s now rebounding after a test of its 50-day line, its first test of that key support level since it began to trend higher. You could nibble here with a stop just below 22, though I would prefer to buy on a move above 23.9, which would tell you the buyers have returned, and use a stop near 22.7 or so.
(Note: If you want more excitement, feel free to take a swing at the Direxion Financial Bull 3x Fund (FAS), which moves around much more quickly than XLF (two to three times as much). If you nibble here, use a stop near 38. If you want to wait for more strength, buy above 44 with a stop near 39. Like SSO, this is a leveraged fund that some brokerage houses won’t allow, though many do—including Fidelity.)
One wildcard ETF to consider is the VanEck Vectors Russia Fund (RSX). I know, I know—“Russia” and “investing” are two words rarely uttered smartly in the same sentence. But I think Russia could be a powerful turnaround situation. The possibility of a more cozy relationship with Russia (and a possible lift of economic sanctions) could help. RSX fell 68% over a five-year period (!) before bottoming last year, and after rebounding for a few months, accelerated higher in December. Now the RSX ETF is consolidating normally—buying around here with a stop near 20 seems like a good risk/reward, or you could wait for a resumption of the uptrend (above 21.8) with a stop near 20.5.
Growth stocks haven’t been real leaders of the post-election market, but I’m seeing signs of that shifting—while most major indexes didn’t make upside progress for six weeks, the growth-oriented Nasdaq eked out new all-time highs a few times. One of the best-looking growth groups remains chip stocks, and my favorite chip ETF is the iShares Philadelphia Chip Fund (SOXX), which is more diversified than other chip-focused ETFs. SOXX has been in an uptrend for months, hitting a new high in late December (about two weeks after most indexes), resting calmly with the market, and this week, appearing to resume its uptrend. (Many individual chip stocks look to be lifting off, too.) A nibble here with a stop near 120 seems like a good risk-reward trade.
While I always keep an eye on interest rates, I almost never trade based on them. But today, I think there’s a unique setup in ProShares UltraShort 20+ Year Treasury (TBT). Granted, I’m not an economist (thank goodness), but fundamentally, it’s a fact that leading economic indicators are at their highest levels since 2010 and there is undoubtedly pro-business talk from the new U.S. administration (especially tax and regulatory cuts). Thus, after years of low and even negative interest rates, the fundamentals suggest higher interest rates and the chart mostly agrees—long-term Treasury bond yields are holding firm at multi-month highs after their post-election surge. TBT allows investors to take advantage of higher rates by effectively shorting long-term Treasuries on a leveraged basis. You could buy some now, though I’d be more interested if TBT shows signs of resuming its uptrend—buying around 41 with a stop near 38 makes sense.
As I mentioned at the outset, ETFs will never be my specialty—I prefer individual leading stocks, especially in a bull market. But the market’s kickoff in November, recent tight trading and the strong upmove this week has set up a ton of potential entries, and with earnings season on the way, these ETFs could offer solid upside at low risk.