"Have you ever seen a more perplexing market?"
That is a question I hear more often than not. Wall Street is always a riddle, but during the last year we are dealing with a Rubik;s cube that has more questions than answers.
How do you make money in such a difficult stock market?
The old standby broad brush strategies of buying growth or buying value do not work. Owning index mutual funds definitely doesn’t work (especially when the markets are down across the board!)
Of course, there is still money to be made in the market, but you need to be a phenomenal stock picker to get it right. While some may have that innate ability to pick winning stocks, most investors don’t.
So what is the average investor supposed to do?
Well, Exchange Traded Funds (ETFs) might be the right answer for you.
With a broad array of long, short, currency, foreign and any combination thereof, there is an ETF out there that could very well make you more money than you are seeing with your individual stocks.
I’ve experienced this firsthand. Previously, my training required that I stick to finding undervalued stocks to make money in the market. I had little time for mutual funds or any other products that took me away from this core strategy.
I’m a stock picker, plain and simple and have had great success, although I have to say that over the past two years finding great stocks has been a difficult.
Oh sure, I have continued to have great success picking winners, but I felt like I needed to broaden my horizons. So at the beginning of this year, I decided to add ETFs to my investing arsenal.
Why? I wanted to have as many tools available to me to make money in the market, and I thought the narrow focus of available ETFs did just that.
Well, it looks like I made a wise move.
ETFs Provide Emerging Market Exposure
Front and center was my decision to have short exposure in my portfolio by shorting emerging markets, including China.
I did this by owning…
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…ProShares China (FXP) and ProShares emerging market short funds (EEV) and (EFZ).
Certainly I could have shorted individual stocks in these markets, but frankly shorting individual stocks is tricky business. I can get more efficient results by owning the ETF with less risk.
Let’s face it, if I’m wrong on an individual stock short, the results could be disastrous. That is not so much the case with ETFs.
In July, I moved my portfolio to a more aggressive long position. I sold my ETFs that were short foreign markets (although these foreign markets still struggle) and rotated into sector ETFs. I rotated my model portfolio into banking, broker-dealers and technology sector ETFs that give me broad exposure to industries that I think are attractive at current levels.
Again, if I like a particular sector and want to own many stocks in that sector I can get that diversification with an ETF (to see one sector I’m staying far away from, see "Buying Homebuilders Just Doesn’t Make Sense").
For investors with a small amount to invest, they can often buy one or two stocks in a group (although that is not what I call broad diversification, something that is very important when trying to beat the market). The biggest winner for me in this new ETF strategy has been my July 22nd recommendation of the ProShares Oil and Gas Ultra Short ETF (DUG). This fund is up more than 27% in less than 2 months of trading.
I was very bearish on oil and gas when oil hit $145 per barrel. Now, I suppose I could have sold oil on the futures market, but this type of trading isn’t for everyone. It’s much easier to find an ETF that accomplishes the same thing. I still like DUG.
If you believe (like I do) that oil is a bubble that is now piercing (see “Chesapeake Energy: Wait for the Oil Bubble to Burst“), DUG should do well as that process unfolds. It’s happening a bit quicker than I expected, but there is still a ways to go now that oil touched $100 per barrel.
We may see $60 again as demand destruction crushes the oil markets.
The idea here is that exchange traded funds can be a valuable addition to your investing arsenal. Augment your stock picks with funds that fit a particular theme that supports your own research.
Doing so can help you make money at a time when having a stock-only strategy is sputtering.
Want more great ETF picks? Then join Tim Middleton’s ETF Insider today and put one of America’s leading ETF experts to work for you! ETF Insider is designed to bring timely information to you as you need it. Each month, Tim will share his expertise and insight on the actions you need to take to become a well-informed ETF investor and achieve market-beating returns. Click here to join RISK-FREE!
