Trying to outperform the overall stock market with smart trades is one surefire way to end up underperforming the market. Let’s keep things simple.
The temptation to chase the performance of the hottest stocks in the market is certainly strong. Everyone else seems to be getting rich on them. Why wouldn’t you?
But as any veteran investor will attest, the grass isn’t always greener on the other side, and a simpler, more passive approach often ends up being more profitable.
Exchange-traded funds, particularly index-based exchange-traded funds (ETFs), have emerged. SPDR S&P 500 ETF Trust (spy 0.12%)Such funds are designed to avoid individual stock risk by making it easy to own a diversified basket of stocks that have at least one common attribute. In the case of the SPDR S&P 500 ETF, the common attribute is the fact that all of the stocks are components of the S&P 500 ETF. S&P 500 index.
With that as a backdrop (and assuming you’ve already established a fundamental position in the SPDR S&P 500 ETF itself), there are a few ETFs worth considering getting into to further diversify your portfolio.
Oh, and there’s also a category called exchange-traded funds, which most investors would be best off avoiding entirely.
Buy Invesco QQQ Trust
Looking to add a little more oomph to your overall portfolio performance but not sure which stocks are poised to do just that? Invesco QQQ Trust (QQQ 0.21%) A smart choice, but be prepared for above average volatility.
The so-called triple Q (or “cube”) Nasdaq 100 The index is made up of the 100 largest publicly listed companies. Nasdaq Stock exchange. That doesn’t mean much in itself. But most of the best-performing stocks in the market over the past few years became the mega-cap companies they are today while listed on the Nasdaq. Some of these stocks include: Microsoft, NVIDIAand AmazonThis tech-focused exchange is the preferred venue for the world’s top and fastest-growing technology companies to list their shares.
There is one drawback: by simply mirroring the Nasdaq 100 index, this ETF can easily become biased towards the biggest companies on the exchange due to their large stock price increases. For reference, Microsoft, NVIDIA, and Apple Each It currently accounts for just over 8% of the index. and The fund’s total weighting (about 25% across the three stocks) is not particularly well diversified in tech stocks, even though it was rebalanced last July to avoid exactly that kind of imbalance. Of course, this imbalance means that Invesco’s fund is vulnerable to a sharp and significant sell-off if these high-flying market darlings fall out of favor for even a moment.
That doesn’t matter: The Invesco QQQ Trust is likely to hold most of the market’s most promising technology growth stocks at any given time, and if you can stomach the volatility, it could well be worth the hard investment.
Buy ProShares S&P 500 Dividend Aristocrats® ETF
Growth is one way investors build wealth. only But that’s not the case: an income-generating portfolio built with high-quality dividend stocks can also do just fine.
It’s true! Dividends haven’t historically (at least not recently) been considered a primary way for investors to get rich, but if you do a little math, you’ll see that dividends, like exchange-traded funds, are ProShares S&P 500 Dividend Aristocrats® ETF (NOBL -0.24%) And indeed, they can. (Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) There’s just one problem.
But first things first.
Dividend Aristocrats® are stocks from S&P 500 companies that have increased their annual dividends for at least 25 consecutive years. Currently, there are over 60 companies that qualify for this title, and most of them have been increasing their annual dividends for much longer than 25 years.
Admittedly, the ETF’s average yield isn’t all that attractive. The fund’s current dividend yield is just 2.3%, according to ProShares, leading some investors to question why this ETF should be considered a long-term winner. Sure, a constantly rising dividend is a plus, especially if you reinvest those dividends in the ETF’s shares. Still, the dividend focus seems to limit its long-term potential.
Important Details do not have The immediate takeaway here is that stocks of companies that have a policy of regularly increasing dividends and the ability to follow through on that policy actually outperform most other stocks. According to calculations done by mutual fund firm The Hartford, shares of companies that have consistently increased their dividends since 1973 have returned an average of 10.2% per year. For comparison, an equal-weighted version of the S&P 500 boasts a more modest average of 7.7%. Stocks that never paid dividends during that period averaged a mere 4.3% annual return. The Hartford concludes that companies that consistently increase their dividends simply tend to be higher quality and better managed.
ohThe trick here is to hold such positions for years and reinvest some of the dividends into more shares of dividend-paying stocks or funds.
Avoid ProShares UltraPro Short QQQ
Finally, most investors ProShares Ultra Pro Short QQQ (Shushushu -0.60%) And then there are the so-called “leveraged bear” ETFs that are similar to this one, which are too risky for the average person.
For those who don’t know, bearish exchange-traded funds rise when the market is falling. This can be done in a few ways, such as simply short selling the stocks included in a particular index. But it’s often facilitated through index-based futures or options trading, which act as short-term bets on the direction of the index. In the case of ProShares UltraPro Short QQQ, the index in question is the aforementioned Nasdaq-100.
But the ProShares Bearish ETF is unique in another way, even by ETF standards: It is also leveraged, meaning that its rises and falls are much larger than the falls and rises of the underlying Nasdaq-100. For every 1% fall in the Nasdaq-100, ProShares UltraPro Short QQQ will rise 3%, and vice versa.
The premise is compelling. Every investor understands that markets go up and down over time. A well-timed investment in such a leveraged bear fund can at least offset the effects of a market-wide correction. It could even produce big profits… if Invest at the beginning of a bear market.
These funds tend to cause more trouble than they are worth and are more likely to do more harm than good.
The market’s long-term trend is bullish, even if it is interrupted by occasional setbacks, and investors can be patient, knowing that the market and its top quality stocks will eventually recover.
That’s not the case with bear funds, especially leveraged bear funds. You won’t know if the stock market has made a big (or even a small) low until much later. That means these ETFs can easily get into the red before you even have time to think about cutting your losses, never mind the fact that we tend to make poor decisions when we’re stressed or anxious.
So the smart way to spend money is to not put yourself in a position where you have to make such a difficult decision in the first place, and to do something that most people, including experts, typically do poorly, without trying to sound pretentious or smart, and just be patient.
