Ranking the 6 Best ETFs by Relative Performance - Cabot Wealth Network

Ranking the 6 Best ETFs by Relative Performance

What is an ETF or Exchange Traded Fund? Can You Still Own Bond ETFs When Interest Rates Are Rising?

ETFs are becoming increasingly popular among institutional investors. Here are the six best-performing ETFs today.

Exchange-traded funds (ETFs) have witnessed a popularity explosion in recent years, and for good reason: they allow small investors to buy a piece of their favorite asset groups more cheaply and with less hassle than buying a traditional mutual fund. ETFs can also be used to track the progress of the leading S&P sectors, which is why even professional traders and hedge fund managers have come to prefer them over individual stocks and commodities.

But what are the best ETFs on the market today? I’ll get to those in a minute.

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With the importance of ETFs expected to increase in the coming years, it’s essential for individual investors to regularly monitor the most actively traded sector and industry ETFs. Doing so can provide you with excellent clues as to what insiders and “smart money” professionals are doing with their money at certain times, which can be very useful during periods of heightened market volatility (such as we’ve lately experienced).

Which ETFs to Look For

With this in mind, let’s take a look at some of the valuable clues provided by several leading industry and sector ETFs. One way you can improve your batting average as an investor is to look for bargain opportunities after the broad market has experienced a huge decline. But how can we spot buying opportunities in a time when so many stocks have suffered so much damage?

One of the most important ways of identifying strong buy candidates is to look for ETFs whose price lines have shown a clear and conspicuous divergence from the benchmark indices, such as the S&P 500 Index (SPX). This simple trick is how many successful traders and investors choose winning stocks and ETFs after a market decline.

The key here is to look for signs that the seasoned market pros are accumulating (buying) stocks. In his book, The Secret of Selecting Stocks for Immediate and Substantial Gains, Larry Williams made this observation:

“To spot professional accumulation, all we need to do is find an example of steady and determined buying in the face of a weak stock market. When this happens, we have a good idea that professional buying is taking place.”

Another way of identifying how well an industry is performing versus the rest of the market is by using a relative performance (RP) line. This technique was developed many years ago by Carlton Lutts, founder of our Cabot Top Ten Trader momentum-investing advisory. He wrote:

“Relative performance (RP) is simply a measurement of how a stock is acting relative to the market as a whole. This can be measured mathematically, but we prefer a visual representation because we have found it easier to analyze. As they say, a picture is worth a thousand words.”

An RP line is basically the stock’s daily closing price divided by the daily closing price of the benchmark S&P 500 Index or another major index. It shows how the stock is behaving compared to the broad market, and as such, is a powerful tool that will give you a considerable advantage over the average investor. The RP line is simple to use; when it’s moving higher, it shows a stock is outperforming the broad stock market. When it’s declining, it shows the stock is underperforming. A steady, level RP line tells you the stock is performing roughly the same as the market.

By combining these two techniques, we now have two reliable ways of detecting accumulation (or informed buying) in an ETF:

Look for a bullish divergence between the market itself—using the Dow 30 or S&P 500 as a benchmark—and the ETF you’re examining. For instance, when the S&P has made a series of lower lows over a certain time period, and the ETF you’re watching has made a series of higher lows in that same period, you’ve just found an ETF that is likely being accumulated by the “smart money” crowd.

Watch for ETFs that are showing above-normal strength when compared to major indices like the S&P by using a relative performance line. You can easily spot an ETF’s relative performance by simply noticing if it has resisted declining in a period of broad market weakness. If it has shown strength compared to the S&P, it’s likely being held by “strong hands” or professionals. And it usually pays to follow the lead of the smart money crowd.

Let’s apply these basic principles to six of the most popular ETFs as we search for the best performers among them. For the rest of this article, I’ll rank what I view as the best ETFs in terms of relative performance, versus the S&P 500, starting with the lowest and working up to the highest ranking. (As a short-term point of reference, we’ll start measuring relative performance from the recent broad market low in May.)

The 6 Best ETFs to Buy Now

  1. An even better example of an industry group with a strong RP line is internet providers. With millions now working from home following the pandemic, the internet has become a service more essential than ever before. Consequently, the stocks of companies which provide internet-related services have been booming. This is illustrated by the strong relative performance of the First Trust Dow Jones Internet Index Fund (FDN)versus the S&P 500. With internet connection now a critical necessity for homebound workers, investors can likely expect to see continued growth ahead in this key industry.

The FDN is one of the best ETFs by relative performance.

  1. Post-pandemic, three trends have emerged that experts believe will continue for years to come, namely digital transformation, cloud migration and a shift to a remote work force. Given the increased emphasis companies across all major business sectors are placing on the cloud, it’s not surprising to see the leading cloud stocks showing relative strength of late. To that end, the Global X Cloud Computing ETF (CLOU) is worth mentioning. It has recently posted a strong relative performance versus the S&P, both on a short-term and a longer-term basis. Given the cloud stocks’ persistent strength compared with most key segments of the broad market in the last two years (see chart below), CLOU is definitely worth a look as an addition to tech-oriented ETF portfolios.

  1. Leading last year’s list of the best ETFs during an extended period of uncertainty was the Vanguard Extended Duration ETF (EDV). The ETF tracks the performance of zero-coupon extended duration Treasury securities and provides exposure to the Treasury bond market. T-bonds have obviously benefited from safety-related demand, and the following graph underscores the conspicuous performance gap between EDV and the S&P 500. EDV is once again one of the top-performing ETFs from and has again earned a spot on our list of the top outperforming ETFs in percentage gain terms.

The EDV is one of the best ETFs today by relative performance.

  1. Cybersecurity is a hot topic right now in the wake of increased threats to the computer systems of some major enterprises. The recent Colonial Pipeline hack underscored the need for enterprises to tighten cybersecurity, especially as more of them migrate to the cloud (which is more exposed to attacks). Consequently, the Global X Cybersecurity ETF (BUG) is one of today’s top performers relative to the S&P 500 Index. With cybersecurity spending budgets expected to increase in the coming year, it wouldn’t be surprising to see continued outperformance in this fund.

  1. The broad commodity market has been outperforming the S&P 500 not only since May, but also all year thanks to the threat of inflation arising from ongoing fiscal stimulus measures. The Invesco DB Commodity Index Tracking Fund (DBC) is a popular commodity-tracking fund heavily weighted toward crude oil, but also encompassing other commodities. Notwithstanding a recent pullback in oil prices, loose central bank and fiscal policies—combined with lower supplies and diminished production—are expected to boost the commodities outlook in the coming months, making DBC an attractive choice for ETF investors.

The DBC is one of the best ETFs today by relative performance.

  1. Commanding a lead over most areas of the market is the real estate sector, which reflects this year’s red-hot real estate market. Low mortgage rates, along with bountiful liquidity and diminished housing supplies, have combined to form a “perfect storm” for real estate investors. An ideal way to gain some exposure to real estate is through the iShares U.S. Real Estate ETF (IYR), which is one of the best-performing sector ETFs as of mid-2021. With the housing market showing no signs of slowing, IYR is likely to continue its relative outperforming in the foreseeable future.

Based strictly on relative performance, these are six of the best ETFs in the U.S. equity market right now. While past performance doesn’t guarantee future results, it usually pays to follow the path of the smart money traders and investors. And the ETFs discussed above appear to be among the favorites of this market-moving crowd.

If you want the best-performing growth stocks right now, I highly recommend subscribing to our Cabot Top Ten Trader advisory, where chief analyst Mike Cintolo provides you with a weekly update some of the market’s strongest growth stocks from both a technical and fundamental perspective.

To learn more, click here.

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*This post has been updated from an original version, published in 2020.

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