The news of the day is how domestic and global markets will respond to Monday’s dramatic collapse. The Dow Jones Industrial Average suffered a record-breaking decline, sparking worldwide panic. The dip, however, may provide the perfect opportunity to go contrarian toward sector-specific ETFs.
Although the major indices have begun to rebound, individual industries are lagging behind. Moreover, the current crisis might not be over just yet. According to Bloomberg, several fiscal policymakers are worried about the impact the Federal Reserve’s changing of the guard will have on investing markets. That suggests we may have further downside, which makes finding sector ETFs to buy a shrewd game plan.
Buying strong, individual companies is a great idea during this fallout. Sector ETFs, however, tend to be more resilient during volatile times. Because they represent a basket of assets, their growth isn’t tied to one particular stock. So in periods of severe uncertainty, finding some sector ETFs to buy is a less risky move.
Here are three now-discounted sector ETFs to buy that will get you started.
Sector ETFs to Buy: iShares Dow Jones Transport (IYT)
If you believe that the recent crash was fundamentally irrational, then you should consider iShares Dow Jones Transport. Avg. (ETF) (BATS:IYT). The transportation sector is a bellwether of the underlying economy. If substantive tailwinds have been pushing this economic rally — and not just Fed policy making — the IYT will show it.
I believe it’s only a matter of time until the economy rebounds; thus, the recent pullback in the IYT gives us a tremendous discount. Against the closing high of this year, IYT shares are down more than 7%. Furthermore, the current trading behavior has been erratic, vacillating from minute to minute. What you’d really want to see is some commitment from the bulls.
Based on this trading ambiguity, I believe IYT is going to meltdown further, perhaps closer to its 200 day moving average at $175. If so, this transportation fund would easily be one of the best sector ETFs to buy. While I understand the anxiety regarding the Fed, it’s difficult to imagine our economy’s wheels falling off.
There are a lot of strong names inside the IYT bucket. Should it slide further, feel free to load up!
Sector ETFs to Buy: iShares MSCI EAFE Index Fund (ETF)
The Dow Jones crash didn’t just rattle our domestic indices; international markets also felt significant shockwaves. From Tokyo to Madrid, seemingly everyone hit the big, red “sell” button. While I can sympathize with the fear driving this, I don’t agree with acting on it.
No matter. Suddenly, blue-chip foreign companies are on discount, so I recommend considering iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA).
EFA holds diverse names such as Nestle SA (ADR) (OTCMKTS:NSRGY), Toyota Motor Corp (ADR) (NYSE:TM), and BP plc (ADR) (NYSE:BP). So the world would have to endure a 2008-style recession for EFA to sharply crater. Even then, I’d remain confident in EFA’s portfolio strength.
Right now, emotions are still frayed, so I expect the fund to fall further. Consider EFA’s performance on Monday: it fell through its 50-day moving average (DMA) at $71. The index fund is still sandwiched between the 50 and 200 DMA of $67. Thus, a fall to this price is possible.
Should the EFA drop anywhere near $67, I would enter a position immediately. Yes, the Dow Jones crash is ugly, but not ugly enough to overlook this index fund’s behemoth holdings.
Sector ETFs to Buy: Vanguard Consumer Staples ETF
Whenever the broader markets falls, I always lean toward consumer staples. No matter what happens to the economy, people still need to cover their basics: food, water, clothing, and shelter.
If you’re more pessimistic about the crash, I’d consider Vanguard Consumer Staples ETF (NYSEARCA:VDC).
Holding the companies whose products stock doomsday bunkers across the nation, VDC is among the most “foolproof” ETFs to buy. On top of that, VDC holds vice stocks, such as Philip Morris International Inc. (NYSE:PM) and Altria Group Inc (NYSE:MO). These are ideal companies to own during down periods due to their stable revenue source and typically high dividend yields.
Another great reason to buy VDC is its sharply discounted price. Against this year’s closing high, VDC is down more than 6%. This magnitude of correction in a short period of time is almost unheard of. The last time VDC corrected so suddenly was during summer-2015’s flash crash.
If you bought the VDC fund back then, it proved to be a very profitable move. I’m betting you’ll see similar results this time around.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.