by Lawrence Meyers | November 19, 2013 9:22 am
While many investors go about their business investing in the market, few really pay attention to whether or not they are beating the market indices.
Attention to detail is important — if you aren’t beating a given index, then why aren’t you just invested in mutual funds or ETFs that mirror that index? For all you know, your actively managed portfolio might even be more risky.
That’s why I like to “turbocharge” my portfolio by adding in various stocks and ETFs that I believe will outperform the market, on top of whatever market index ETFs I have anchoring a given asset class in my diversified portfolio. In this case, I’m looking at four sector ETFs that I think might be overweight.
Why sector ETFs? The idea is that sector-concentrated funds often beat the market because of their concentration. If you’ve ever glanced at a large fund family’s sector fund offerings, you’ll see they often significantly lag or significantly outperform the broad indices. If you choose the right sectors, you’ve got your turbocharge fuel. But be advised: Choosing the wrong sectors could stall your portfolio.
Here’s a look at four sector ETFs that look poised to race past the broader market.
ProShares Ultra Oil & Gas (DIG) is a leveraged ETF designed to provide twice the returns of the Dow Jones Oil and Gas Index, which holds dozens of big-name energy companies.
I like just about any energy ETF because I believe fossil fuels are here to stay, no matter what the green energy people say about it. The world needs oil, and it will always need oil. We even fight wars over the stuff. That’s a sector you want to be in, and you want to be in a leveraged ETF as we head into the winter.
Top holdings include ExxonMobil (XOM) and Chevron (CVX). Expense ratio is 0.95%, or $95 for each $10,000 invested, compared to 0.09%, or $9 per $10,000, for SPDR S&P 500 (SPY).
Consumer Staples Select Sector SPDR (XLP) is going to see a lot of action in the years to come. The economy is sluggish. More people have left the workforce than at any other time in modern American history.
Despite all this, people still need to buy certain necessities, or “staples”. For those who used to be in slightly higher income brackets, and are now finding themselves struggling, they’ll be moving out of discretionary purchases and allocating more money into staples. That’s why this ETF is poised to outperform until things turn around significantly.
Top Holdings include Proctor & Gamble (PG), Coca-Cola (KO), and Philip Morris International (PM). And the expense ratio is a cheap 0.18%.
WisdomTree Brazilian Real (BZF) is a sector fund focusing on Brazilian debt and currency contracts. Brazil’s economy has been on fire, and only this year has it started to cool down a bit.
The private equity and hedge funds I speak to are unanimous — South America is the next region of growth. We’re seeing it in Costa Rica and Colombia, and Brazil will heat up again. Brazil insists on becoming increasingly modern and westernized, despite a lack of present infrastructure. Meanwhile, there’s more technology to feed into the population. When South American stocks take off, it’s going to be huge.
The BZF expense ratio is 0.45%, a bit pricey, but that’s what you get with more obscure ETFs.
Health Care Select SPDR (XLV) shouldn’t come as a surprise pick. The Affordable Care Act is forcing people to buy insurance, and that means many folks will have access to big pharma products for the first time. Since this sector ETF holds all the big pharma and big insurance names, it seems like a slam-dunk to outperform as well.
But overall, people will always need health care. Baby boomers are getting older, and technology is driving more products into the market for doctors and hospitals to purchase. Pharmaceuticals will always be aggressively marketed to doctors and patients — you can’t even walk into a doctor’s office without seeing a salesman coming or going. And given the sheer range of health issues out there, biotech research and products will always be in demand.
The XLV’s expense ratio is 0.18%, and top holdings include Johnson & Johnson (JNJ), Pfizer (PFE), Merck (MRK), Amgen (AMGN), and Biogen Idec (BIIB).
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.
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