Bargain hunters are finally coming after some of the hardest hit areas in the market. And it makes sense. These top ETFs to buy are already down 67% from their highs on average, suggesting they’ve arguably already priced in the worst. In addition, these funds were some of the first to peak last year, so they could certainly be some of the first to bottom. Their valuations have been smashed to pieces, making them tempting targets for the few remaining optimists.
But it’s not just the steep discount that should be catching your eye. The improving technicals point toward selling pressure drying up and a new uptrend being born.
As notable as the absolute performance has been, it’s how these funds stack up against the broader market that I find most interesting. After months of underperformance, all three have bested the S&P 500 in recent days, suggesting that buyers are finally flocking.
Let’s take a closer look to see what all the fuss is about. Then I’ll pitch a smart options trade you can use to capitalize.
|XBI||S&P Biotech ETF||$74.25|
|ARKK||Ark Innovation Fund||$42.62|
|KWEB||KraneShares CSI China||$31.86|
ETFs to Buy: S&P Biotech ETF (XBI)
Drawdown from the Peak: -58%
The S&P Biotech ETF (NYSEARCA:XBI) has returned to prices first reached in 2014, effectively wiping out eight years of gains. You don’t see buying opportunities like this very often. The destruction has shrunk valuations and made XBI a compelling contrarian investment if you think the damage is overdone. Its higher volatility should mean significant potential gains when the Street returns to embrace growth stocks.
And you might not have to wait long. XBI held the retest of its lows last week and is on the cusp of completing a double bottom pattern that will send prices back above the 50-day moving average. A close over $74 would seal the deal and bring momentum traders rushing in for the next leg higher. The bottoming attempt is bolstered by multiple high volume up days, so we are seeing signs of institutional accumulation.
The Trade: Buy the September $72/$90 bull call spread for $5.50.
You’re risking $5.50 to make $12.50 if XBI rises to $90 by expiration.
Ark Innovation Fund (ARKK)
Drawdown from the Peak:-74%
Perhaps no other ETF has captured the rise and fall of growth stocks quite as well as the Ark Innovation Fund (NYSEARCA:ARKK). Cathie Wood’s flagship was on top of the world in early 2021 and could do no wrong. Now, with prices down 74% and back to the March 2020 pandemic lows, only the longest-term of shareholders is up money.
But if you set aside the souring sentiment and focus on the price action, you’ll notice subtle signs of strength.
For instance, when the S&P 500 was crashing to new lows last week, ARKK bounced at its old support zone. Its price trajectory has followed that of XBI, and we have a potential double bottom in the making. Rather than piling in immediately, consider waiting for a break of resistance ($46) and the declining 50-day moving average to complete the reversal attempt and provide additional evidence that buyers have wrested control of the short-term trend.
At that point, I like buying December call spreads such as the $45/$65 to position for a recovery in the back half of the year.
ETFs to Buy: KraneShares CSI China Internet ETF (KWEB)
Drawdown from the Peak: -69%
The final candidate for today’s ETFs to buy is the KraneShares CSI China Internet ETF (NYSEARCA:KWEB). Shares have already rallied 50% off the lows, and they’re still 69% off the highs. The adversarial stance that Chinese regulators have taken with their public companies has decimated share prices. But we’re finally at a point where bargain hunters seem to be dipping their toe in.
Momentum patterns for KWEB have shown signs of a trend reversal, and the rebound off the lows has been enough to turn the short-term and intermediate-term trends higher. Prices have been trending above the 50-day moving average for over a month now, and we have a consistent set of higher pivot lows to confirm increasing demand.
A bull pennant pattern has formed over the past three weeks. Watch for a break higher to confirm the next advance has begun.
The Trade: Buy the November $35/$45 bull call spread for around $2.50.