Three ETFs to Outperform the Markets in the Long Term
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
An investor who buys an individual stock is tied to that company's future until the time of sale, for better or for worse. This means the possibilities to achieve extraordinary returns are much higher with stocks than with Exchange Traded Funds - ETFs -, but so are the chances of severe loses if the company doesn't do as expected.
ETFs; on the other hand, provide broad diversification at a conveniently low cost, and with the same operational simplicity as buying an individual stock in the markets. Although lower returns should be expected from ETFs in comparison to the best performing stocks, these vehicles still provide the opportunity to beat the markets, while risks are sensibly lower than when investing in particular stocks.
Investors can bet on certain sectors, regions, countries or even asset classes via ETFs, and that´s certainly an attractive proposition for those looking for ways to implement investment ideas while capturing the benefits of diversification. The different companies which make the portfolio of an ETF are not going to go broke all at the same time, and changes in the competitive position of individual companies are not so dramatically important when the investor has a diversified position via ETFs.
One sector which looks well positioned to beat the general markets over the following years is technology: many companies around the world are building products and services which are extremely valuable and innovative, and investors can achieve efficient exposure to this sector via an ETF like Technology Select Sector SPDR (NYSEMKT:XLK).
Companies like Apple, Google, Microsoft and IBM make the portfolio of this ETF, and they are constantly producing new technologies which make our life better and more productive. They compete against each other in different businesses, but as a group the tech sector has generated a lot of value over the last years. Successful innovation is probably the best way to benefit shareholders in the long term, and the companies in XLK are well known as many of the biggest innovators of our time.
The agribusiness sector has some very strong tailwinds which should benefit investors over the following years as well. The World population is growing, and countries like China and India are demanding better and more food as they change their alimentary habits. Mass migration from rural areas to the cities in emerging countries is reducing labor availability for agricultural production, so productivity needs to be constantly rising in the agro sector if we want to satisfy a growing demand with less labor and land resources.
Fortunately, companies like Monsanto and Syngenta are permanently working to deliver better and more productive seeds, while others, like Mosaic and Potash, produce the fertilizers required to increase land productivity. There are also companies like Deere and CNH which manufacture tractors and machinery to work the land in the most efficient ways. All these companies are included in the portfolio of Market Vectors Agribusiness (NYSEMKT:MOO), and this ETF is in a good position to outperform the markets due to the strong fundamentals shown by the agribusiness sector.
Emerging markets stocks can be a risky investment on an individual basis. The lack of familiarity with the particularities of each company and their home country can be an important drawback for US investors when trying to choose the best emerging market names. At the same time, the regulatory environment in some countries tends to be unstable and sometimes even unfriendly for foreign investors.
None of this means that emerging markets should be left out of the equation; quite the contrary, many of the best investment opportunities in the approaching years are likely to come from these parts of the world. Much higher economic growth than in developed nations, coupled with strong fiscal positions and economies focused on production and exports instead of services and imports are some of the factors which should provide superior returns for emerging market stocks in the long term.
WisdomTree Emerging Mkts Small Cap Div (NYSEMKT:DGS) invests in a portfolio of 547 emerging market stocks with small capitalizations and high dividend yields. The portfolio construction sounds like a very smart idea as smaller companies have the best opportunities for growth, and filtering by dividend yields helps avoid the riskier and more speculative names while at the same time provide income to investors. Small companies from emerging markets paying strong dividend yields - those are three individual factors which combined should provide above average performance for this instrument over the following years.
There are different ways to outperform the markets, and investors should apply the strategies which better fit their needs and risk tolerance. Buying ETFs with the best fundamentals and profiting from volatility by increasing positions at favorable prices is a simple but powerful strategy to obtain a convenient risk and return combination through the years.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.