ETFs
2 index ETFs to buy without moderation and 1 to avoid
The temptation to chase the performance of the hottest stocks on the market is strong, that’s for sure. Everyone seems to get rich from them. Why not you ?
However, as seasoned investors can attest, the proverbial grass isn’t always greener on the other side of the fence. A simpler, more hands-off approach often proves more rewarding.
Enter exchange-traded funds, specifically index funds exchange traded funds — or ETFs — like the SPDR S&P 500 Exchange Traded Fund (NYSEMKT: SPY). These funds are designed to help you avoid the risks associated with individual stocks by allowing you to easily own a diversified basket of stocks that share at least one common attribute. In the case of the SPDR S&P 500 ETF, the common attribute is that all of the stocks are constituents of the ETF. S&P500 hint.
With that in mind (and assuming you’ve already established a core position in the SPDR S&P 500 ETF itself), there are a few ETFs you may want to consider getting into to further diversify your portfolio.
Oh, and there’s also a whole category of exchange-traded index funds that most investors are simply better off avoiding altogether.
Buy Invesco QQQ Trust
If you’re looking to add a little more momentum to your overall portfolio performance but aren’t sure which stocks are ready to do so, the Invesco QQQ Trust (NASDAQ: QQQ) is a smart option. Just be prepared for above-average volatility.
The so-called triple Qs (or “cubes”) reflect the performance of the Nasdaq-100 index, which includes 100 of the largest companies listed on the Nasdaq Sotck exchange. That doesn’t mean much in itself. But it turns out that most of the market’s best-performing stocks in recent years have become the mega-cap companies they are today when listed on Nasdaq. Among these names we find Microsoft, NvidiaAnd AmazonThis tech-heavy exchange is just the place where the world’s largest – and fastest-growing – tech companies want to list their shares.
There is a downside to this. Indeed, by simply replicating the Nasdaq-100 index, this ETF easily becomes overweighted by the largest companies on the stock market due to the outsized gains of their stocks. For comparison, Microsoft, Nvidia, and Apple each currently represent just over 8% of the total index and fund value (around 25% for three stocks). This is not a particularly well diversified basket of technology stocks, despite a rebalancing imposed in July last year which was supposed to avoid this type of imbalance! This imbalance of course leaves the Invesco fund prone to large and significant drawdowns whenever these market darlings fall out of favor a bit.
The story continues
It just doesn’t matter. The Invesco QQQ Trust is still more likely than not to hold many of the most promising technology growth stocks on the market at any given time. If you can handle the volatility, it’s well worth the wild ride.
Buy the ProShares S&P 500 Dividend Aristocrats® ETF
Growth is one way for investors to build wealth. It’s not the only way, though. An income-generating portfolio built on high-quality, split-compensation stocks can also do the job well.
It’s true! Although investors have not historically (not recently anyway) viewed dividends as the primary way to get rich, a little math clearly shows that an exchange-traded fund like ProShares S&P 500 Dividend Aristocrats® ETF (NYSEMKT: NOBL) is indeed up to the task. (Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) There’s just one problem.
But, first things first.
A Dividend Aristocrat® is simply an S&P 500 company stock that has increased its annual dividend payout for at least 25 consecutive years. Currently, more than 60 of these names qualify for this designation, although most of them have been increasing their annual payouts for well over 25 years.
Granted, the average yield isn’t particularly exciting. The fund’s current dividend yield is just 2.3%, according to ProShares, leading some potential investors to wonder why this ETF should be considered a long-term winner. Sure, its steadily increasing dividend payout helps, especially when you reinvest those dividends in more shares of the ETF. Still, its long-term potential seems limited by its dividend-focused orientation.
The important detail that isn’t obvious here is that stocks of companies with a policy of consistently raising their dividends—and the ability to implement that policy—actually outperform most other stocks. Calculations by mutual fund company Hartford indicate that since 1973, stocks of companies that have reliably increased their dividend payments have averaged an annual gain of 10.2%. For perspective, an equally-weighted version of the S&P 500 averages a more modest 7.7%. Stocks that haven’t paid dividends during that period have averaged an annual gain of just 4.3%. Hartford concludes that companies that consistently pay dividends tend to simply be higher-quality, better-managed companies.
And the catch? The key here is to leave such a position as is for years while reinvesting those dividend payments in more shares of the company or in the fund that pays them.
Avoid ProShares UltraPro QQQ Short
Last but not least, most investors will want to avoid ProShares UltraPro Stock Short QQQ (NASDAQ: SQQQ) and other similar so-called “leveraged” ETFs. They simply pose too much risk for the average person.
If you’re not familiar with them, bearish exchange-traded funds rise when the market is falling. This is made possible in several ways, including simply shorting stocks found in a particular index. Most often, however, this is facilitated through trading in index-based futures or options that serve as short-term bets on the direction of an index. In the case of the ProShares UltraPro Short QQQ, the index in question is the aforementioned Nasdaq-100.
The ProShares Bear ETF is unique, even by ETF standards, in another way. That’s because it’s also leveraged, meaning it moves up and down much more than the underlying Nasdaq-100. For every 1% decline in the Nasdaq-100, the ProShares UltraPro Short QQQ gains 3%, and vice versa.
The premise is compelling. All investors understand that the market moves up and down over time. Well-timed exposure to a leveraged bear fund like this could at least offset the impact of a market-wide correction. It could even prove to be a major source of income… if you plug into it at the start of the bear market.
These funds tend to be more trouble than they are worth and can easily do more harm than good.
You see, the long-term trend of the market is bullish even if it is sometimes interrupted by setbacks. Investors can afford to be patient, knowing that the market and its highest quality stocks will eventually recover.
This is not the case with bear funds, especially leveraged bear funds. Not knowing if the stock market has hit a major (or even minor) bottom for a long time means these ETFs can easily fall into the red before you even start thinking about cutting your losses. Not to mention the fact that we tend to make bad decisions when we’re stressed or anxious!
The best decision to make is therefore not to put yourself in a situation where you would have to make such a difficult decision. Just be patient, without trying to fake it or be clever by doing something that the vast majority of people, including professionals, generally don’t do well.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, and ProShares Trust – ProShares S&P 500 Dividend Aristocrats ETF. The Motley Fool recommends Nasdaq and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a position in Amazon, Microsoft, Nvidia, and ProShares Trust – ProShares S&P 500 Dividend Aristocrats ETF. The Motley Fool recommends Nasdaq and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. disclosure policy.
2 index ETFs to buy without moderation and 1 to avoid was originally published by The Motley Fool