Exchange-Traded Funds: ETFs Are a Key Investing Solution

There’s no denying that the market action this year has kept us on our toes. It has created the kind of environment that many like to call a stock-picker’s market, specifically because of the large gap the volatility forms between the winners and losers.

Exchange-Traded Funds: ETFs Are a Key Investing Solution

Looking at the S&P 500 over the last year, 93 stocks are up 20% or more while 77 are down that same amount. A full 67% of the index moved at least 10% in one direction or the other.

Now, a 10% move in 12 months may not sound all that riveting, but when you consider the S&P was up just 5% overall, those big moves become that much more important.

The great thing about a stock-picker’s market is that investors still have the opportunity to make good money even when the market is down or sideways.

However, in order to come out on the right side of the trade, you need to have not only the ability to pick the winners out of the crowd but also the willingness to take on company-specific risk.

The thing is, not all investors are in that camp. Many have been burned by the market’s weakness in recent years and are not willing to jump off the sidelines just yet. Or if they are, they’re not willing to take on the risk associated with owning individual stocks.

The Beauty of ETFs

That’s where exchange-traded funds, or ETFs, come into play. An ETF is a versatile investment that tracks an index, commodity, bond or basket of stocks. That may sound like a mutual fund to you, and it’s true that they do share similarities. However, ETFs trade like a stock throughout the day, and often have higher liquidity and lower fees than mutual funds, so they’re an attractive option for individual investors.

There’s a misconception among investors that ETFs don’t offer big returns and are for more boring buy-and-hold portfolios. This couldn’t be farther from the truth.

Yes, there are some conservative ETFs out there, but there are also plenty of conservative individual stocks. And just because they’re conservative doesn’t mean they don’t hold serious profit potential.

Let’s take a look at the action in some sector ETFs over the last year. Conservative names like Utilities SPDR ETF (XLU) and iShares Cohen & Steers Realty Maj. ETF (ICF) are up 14% and 13%, respectively, as investors pour money into sectors that pay above-average dividends in this low-yield environment. Then there’s the Market Vectors Gold Miners ETF (GDX), which isn’t exactly considered conservative but has climbed a whopping 136%.

The great thing about ETFs is that there are so many to choose from — nearly 2,000 to be exact. And that means there is at least one for every type of environment. When the broad market moves lower or turns into a bear market, picking an individual stock that won’t pull back is very difficult. It’s actually nearly impossible. But in the world of ETFs, there are still plenty of opportunities to make money. Bond ETFs and precious metal ETFs are just two examples.

Plus there are inverse ETFs, which actually bet on weakness in certain areas.

We’ll talk lots more about the different types of ETFs and strategies for investing in them in future articles, but for now the important thing to understand is how beneficial they can be in your portfolio. The key is identifying the right sector, the right fund and the right entry point. It’s a daunting task, but it’s exactly what people like me and my partner Hilary Kramer are here for – and we love what we do!

In fact, we’re putting the final touches on a new and exciting endeavor right now. It’s a brand new investing service that is not only timely to the kind of market environment we’re currently in, but also gives you access to explosive profit potential.

As I mentioned, we’ll talk more about this in upcoming articles, so stay tuned and be on the lookout.

Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks, the ETF Bulletin and Co-Editor of Breakout Stocks. As of this writing, he did not hold a position in any of the aforementioned securities.

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