This is not a good time for growth stocks. The United Kingdom’s decision to leave the European Union caught the market off-guard, and between the surprise and the worries about what that could do for Britain’s economy (and what it means for the rest of the world), defensive plays have become the rage.
That’s not going to change very soon, either. As the U.K. digests the ramifications of the vote, and its leaders try to figure out when to begin a timetable, we can expect the markets to go into something of a holding formation until the situation becomes clearer.
For investors, that means extended periods of risk-off trade, which bodes well for things such as high-yielding dividend stocks, solid utilities, gold and Treasuries.
But at some point, we’re going to get a resolution — whether it’s at least a confirmation that the Brexit is fully on, letting investors get on with their lives, or some sort of reversal or signal that the U.K. won’t go through with it, in which case you can expect the market to celebrate.
In either case, investors should be ready to pounce on a number of growth plays that have just been mired of late. Here’s a look at three candidates you should have on your watch list.
High-Growth ETFs: iShares Core S&P Small-Cap ETF (IJR)
Expenses: 0.12%, or $12 annually for every $10,000 invested
The iShares Core S&P Small-Cap ETF (NYSEARCA:IJR) is one of the largest exchange-traded funds that invests in small-cap stocks. At more than $17 billion in assets, only one other ETF is larger — the iShares Russell 2000 ETF (NYSEARCA:IWM), which also invests in small-cap stocks.
The investment thesis here is pretty straightforward. When the markets become volatile in general, and especially when Wall Street is eating a strong, sudden slide, investors flee from more risky assets like small-cap companies. And for good reason: These companies don’t have the same kind of financial safety net that larger, blue-chip stocks do, and if a quick downturn becomes a prolonged downturn, these are the kinds of firms that will be at serious risk of evaporating.
To wit, just look at the heavily publicized 5%-plus dip in the S&P 500 during the Friday-Monday dip. While that was going on, the Russell 2000 small-cap index was busy losing nearly 7%.
But when investors regain their nerve, expect a push back into IJR holdings such as Blackbaud, Inc. (NASDAQ:BLKB), which provides software for philanthropic organizations, or NuVasive, Inc. (NASDAQ:NUVA), which develops spine surgery products, as well as biologics.
And why IJR over IWM? Well, it’s slightly cheaper (by about 8 basis points), it’s a better performer over every meaningful time period and it has a slightly more concentrated holdings list of about 600 versus IWM’s roughly 2,000.
High-Growth ETFs: SPDR S&P Biotech ETF (XBI)
The SPDR S&P Biotech ETF (NYSEARCA:XBI) and other biotech funds aren’t just on a Brexit dip — they’re on a nearly yearlong slide. XBI in particular is off more than 40% from its July 20 peak.
Still, biotech stocks are among some of the riskiest assets on the market, so when the Brexit sparked a flight to quality and security, that meant enormous losses for the risky healthcare plays in the XBI. SPDR’s biotech ETF dropped nearly 9% from June 24 through the end of June 27.
Biotechs have been hampered by a number of factors, including profit taking after a monstrous multiyear ramp-up, as well as concerns that Hillary Clinton might hold back the industry by fighting to keep a cap on the price of medical treatments.
But at this point, the selloff reflects a lot more than the possibility of stingier prices — at what’s nearing a halving of the XBI; it feels like the market is signaling the doom of anyone working on a medical breakthrough. And that’s just not the case.
Another risk-on market should see money flow back into biotechs, and that means good things for the likes of gene program builder Intrexon Corp (NYSE:XON) and RNA-targeted therapeutics outfit Ionis Pharmaceuticals Inc (NASDAQ:IONS).
High-Growth ETFs: Guggenheim Solar ETF (TAN)
Expenses: 0.7% (includes 10-basis point fee waiver)
Solar stocks have just plain sucked in 2016.
The continued decline in oil prices that bled into 2016 has weighed on solar companies, as cheaper oil tends to reduce demand for alternative-energy solutions.
But investors also have had to swallow a couple of individual collapses in the space. Solar system installer Sunedison Inc (OTCMKTS:SUNEQ) filed for bankruptcy back in April, which naturally saw shares lose almost all of their value in the process. Elon Musk’s SolarCity Corp (NASDAQ:SCTY) has also dropped by more than half so far this year amid increasingly troubling financials, and its best hope right now is a proposed buyout by Musk’s Tesla Motors Inc (NASDAQ:TSLA).
Meanwhile, the solar industry in general is worried about oversupply in the second half of this year, and whether the next president will uphold the Environment Protection Agency’s Clean Power Plan.
Things have been so uncertain that when oil and oil stocks started to rebound earlier this year, the Guggenheim Solar ETF (NYSEARCA:TAN) — which had largely been coupled to traditional energy stocks for a couple of years — just kept on diving. For the year-to-date, TAN is as about as ugly as a traditional equity ETF can get, with shares off roughly 35%.
However, TAN is nearing all-time lows and solar stocks have become outright cheap in the process. There are a lot more “ifs” that have to play out over the coming months, but expect this fund to hit a floor soon as the value proposition and the long-term potential for solar stocks becomes too much for investors to ignore … especially if a Brexit resolution makes investors feel aggressive again.