The abundance of different types of ETFs can be overwhelming to newcomers, but when utilized in the right manner, they can provide a significant edge to investors.
Here are four key advantages for investors looking to utilize ETFs in an attempt to build a winning portfolio:
Sector Bets
ETFs provide a way for individual investors to bet on a sector or industry and achieve a fair amount of diversity in the process.
For instance, an investor looking to add an agriculture play to his or her portfolio might be eyeing companies such as AgriumAGU, MonsantoMON, MosaicMOS or PotashPOT.
Rather than trying to choose between these alternatives, the investor might be better served in this case by going with an ETF.
Chris Johnson, CEO and Market Strategist of Johnson Research Group, is bullish on the PowerShares DB Agriculture FundDBA, which is a bet on the underlying commodities that have been fueling the agriculture boom for these companies. The ETF is comprised of wheat, corn, sugar and soybean futures. The fund is up 28.1% year to date, vs. a negative 6.0% return for the S&P 500.
"We use the ETF because it allows us to stay away from company-specific risk," Johnson said.
David Vomund also uses ETFs to achieve diversity. Vomund is the President and Founder of Vomund Investment Management, which specializes in ETFs. His firm recently used the iShares Dow Jones US Home Construction FundITB as a means of gaining exposure to the homebuilders.
"I love the way the fund is rising in the face of a constant stream of bad news," he said. "Just look at last Tuesday -- while the news headlines highlighted the biggest drop in housing prices in 20 years, this fund leapt over 6%."
The fund is up 17.5% year to date and has approximately 20 holdings, which include D.R. HortonDHI, KB HomeKBH, Pulte HomesPHM and Toll BrothersTOL.
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