One of the most difficult decisions that I and other investors face is, oddly enough, when a stock or other security is doing really well. I hate chasing price, but if something is going gangbusters, I can’t deny that there’s a huge temptation to get in on the action.
A lot of top performers tend to be sector-related as well. That usually implies a lot of volatility and short-term, news-driven elements pushing things higher. But that’s when it becomes a momentum play, and inevitably, the crash falls.
So in general, I tend to stay away from the best-performing stocks, ETFs or mutual funds for any given period. I don’t want to be tempted, and I want to stick to my discipline for investing, which is finding good companies and sound ETFs that aren’t terribly exotic.
But because it’s nice to find a gem where you least expected it, I looked at some of the year’s best ETFs to see if any of them are more than just momentum plays about to spoil. Here’s what I found:
Best ETFs: Direxion Daily India Bull 3x Shares (INDL)
Year-to-Date Performance: 81%
Trailing-12-Month Performance: 107%
One of the best ETFs over the trailing 12 months is the Direxion Daily India Bull 3x Shares (INDL). This $73 million ETF is intended to offer three times the return of the Indus India Index, which consists of 50 stocks, including big weights in chemicals and energy company Reliance Industries and tech outsourcing firm Infosys (INFY). Seas Sterlite (SSLT), a $13 billion natural resources company, is another big name.
The INDL has more than doubled over the past 12 months and is up more than 80% since the start of 2014, but it has slowed down (relatively speaking), gaining just 11% in the past three months.
Frankly, I would avoid INDL like the plague. It’s a country-specific leveraged fund that’s top-heavy in a few countries. To me, this is no better than casino gambling, and for that, I’d rather buy Wynn Resorts (WYNN).
Best ETFs: ProShares UltraPro QQQ (TQQQ)
Year-to-Date Performance: 43%
Trailing-12-Month Performance: 96%
The ProShares UltraPro QQQ (TQQQ) is a near-doubler itself, and has returned nearly 25% in the past three months. This is another leveraged fund, this time multiplying the returns of the Nasdaq-100, which includes big tech names like Apple (AAPL) and Google (GOOG).
In this case, I’m almost sold. I know this index, I know the companies in it, the market is doing very well, and I might be tempted to buy some on pure speculation. So if I had discretionary trading money, I might buy in with a very tight stop-loss of 5% to 7%, just in case the market reverses.
More likely, however, I would consider allocating a portion of long-term money to the non-leveraged version of this ETF, the ProShares QQQ Trust (QQQ). Granted, 1x returns are certainly less than 3x returns, but the same can be said about the losses, too.
Best ETFs: Direxion Daily Semiconductor Bull 3x ETF (SOXL)
Year-to-Date Performance: 70%
Trailing-12-Month Performance: 115%
The situation with the Direxion Daily Semiconductor Bull 3x ETF (SOXL) looks similar to the INDL’s. This incredible fund is up 115% in the past years, but it looks like its best days are behind it, with just 4% returns over the past three months.
I’m not terribly uncomfortable with SOXL’s subject matter — it aims to return three times the performance on the PHLX Semiconductor Sector Index, which includes well-known names such as Texas Instruments (TXN) and Advanced Micro Devices (AMD).
But this sector has run hot for almost two straight years, so the turbulence of the past three months is more than enough to sound off the alarm bells — especially in a leveraged product such as this.
SOXL might be one of the best ETFs of late, but its best days are likely behind it, at least for now. Interest appears to be waning, so move along.
As of this writing, Lawrence Meyers was long AAPL. 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 firstname.lastname@example.org and follow his tweets at @ichabodscranium.