Five ETFs to Beat 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.
ETFs are perhaps the biggest revolution affecting retail investors over the last years. These instruments provide the possibility to diversify your holdings in a very simple and cost effective way, and they are also excellent vehicles to bet on different economic sectors, regions, or investment ideas. Keeping this in mind, here are some interesting possibilities in ETFs positioned to outperform the markets in the long term.
It would be hard to find a sector offering more possibilities for innovation and growth that the tech business. Companies like Apple, Google and Amazon - to name a few high profile names – know how to deliver mind blowing products and services with enormous disruptive potential. The profits for investors in these successful companies have been nothing short of amazing, but the risks in this sector are also considerable.
The winner of today may rapidly become the loser of tomorrow, just like Google overtook Yahoo, or Apple brought Research in Motion to the ground. Investors need to be very careful about the always changing competitive dynamics in the tech industry. That´s where diversification can be your best friend. Holding a group of companies in the tech business can materially reduce the risks of being invested in the wrong stock, while still positioning your portfolio for long term growth.
PowerShares QQQ Trust (NASDAQ: QQQ) tracks the NASAQ 100 index, so it includes many of the most renowned big growth stocks in the market. This ETF has a heavy tilt towards technology; Apple, Microsoft, Google and Intel are among its biggest positions, but it also includes biotech stocks like Amgen and Gilead, and even some high growth consumer names like Starbucks and Costco. Many of the most attractive companies with superior growth possibilities are included in this ETF, not only in tech but in different kind of businesses.
For a pure technology play, Technology SPDR (NYSEMKT: XLK) may be what you are looking for. An investment in this ETF means exposure to subsectors like computers and peripherals (24% of assets), IT services (17.5%), software (16%), telecom services (13%) and semiconductors (9.5%) among others. Many of the holdings of this ETF are familiar names to investors; companies like Apple, Microsoft, IBM and AT&T are among its biggest positions.
Just like technology is a high growth business where diversification can be a valuable tool to reduce risks, emerging markets are a similar investment thesis. There is little doubt about the fact that emerging nations offer superior prospects for economic growth over the following decades, but betting on little known companies from far away countries can be too uncomfortable for some investors in terms of their risk tolerance.
Vanguard Emerging Markets (NYSEMKT: VWO) holds more than 870 companies, and only its biggest position, Samsung, is bigger than 2% of the portfolio, so the degree of diversification is better than adequate in terms of individual names. On the other hand, being market cap weighted, it has a tilt towards sectors like Financial Services (23.3% of the portfolio), Technology (14.6%) and Basic Materials (12.7%). These are generally cyclical sectors, which generates increased volatility but also the potential for higher gains based on the long term economic perspectives of these countries.
Those willing to take one step further in terms of volatility and potential for returns could consider investing in Guggenheim BRIC (NYSEMKT: EEB), which holds companies from the BRIC – Brazil, Russia, India and China – group of countries. Not too long ago, BRICs used to be the hottest among the hot emerging countries, but they are seen under a much more hesitant light nowadays.
A worrying economic slowdown in countries like China and Brazil, combined with growing concerns about the political and institutional environment in BRIC countries, has produced uninspiring returns for ETFs like EEB lately. In fact, this ETF is down more than 10% for the last year, while the S&P 500 index is up by more than 20% in the same period. BRIC countries may remain volatile for some time, but these issues seem like temporary setbacks in the road to economic development as opposed to permanent problems, so it may be a good time to consider an ETF like EEB now that it’s trading at pessimistic valuations.
One very interesting idea is to get exposure to emerging markets via an ETF like Wisdom Tree Emerging Markets Equity Income (NYSEMKT: DEM), which holds a well-diversified portfolio of 300 high dividend emerging market companies. Dividends help to avoid the most speculative corporations, and high dividend stocks have been proved to generate an attractive risk and reward equation for long periods of time. Emerging markets are one attractive investment thesis, and so are dividend stocks, so the combination of both factors seems like a really good idea for long term investors.
When the growth opportunities are exciting, but the risk from specific companies is too high, ETFs can be the best ally of an investor. Technology and emerging markets are two attractive places were ETFs may be useful, and these five instruments are well positioned for superior returns in the long term.
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.