The premise of getting rich by picking the right stocks can be downright intoxicating. The fact is, however, that most individual investors, as well as professionals, tend to underperform the broad market.
And the really active investors often see the worst results. The most active traders are believed to actually lose money, victims of misleading messages that this game is easy to play … and win.
If that's you, there's hope, because you don't have to pick individual stocks. You can buy and sell entire baskets of them within exchange-traded funds, or ETFs. Like traditional mutual funds, ETFs are inherently diversified by the dozens (if not hundreds) of different stocks held within them. Exchange-traded funds can be bought and sold like individual stocks, and best of all, every imaginable grouping of companies — index constituents, sectors, or even broad themes — are readily available in some flavor of exchange-traded fund. Here's a look at three top ETF prospects right now for anyone that's been burned by the never-ending hunt for the next hot stock.
Start with a piece of the entire market
It's not just obvious, it's downright cliche, but the best way to ensure you don't lag the overall market is to invest in the overall market (or at least most of the market), and you can do that with the help of an ETF like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
The S&P 500 doesn't include every company traded within the United States, but stocks within the index are some of the country's biggest companies, accounting for around 80% of the nation's investable market cap. While there are some funds that let you invest in the entirety of the market, for most investors, an S&P 500-based mutual fund or ETF is the easiest and most accessible way to gain exposure to the broad market.
And statistically speaking, you're certainly better off making that choice. Standard & Poor's reports that over the course of the past five years, 75% of U.S. large-cap mutual funds underperformed the S&P 500. If you stretch that time frame out to 10- and 15-year periods, the average number of funds that trail the large-cap market's returns consistently swells to more than 90%. It's a testament to just how tough it is to trade individual stocks and deliver a market-beating performance.
Sure, it's possible you could be an exception to this norm by curating your own portfolio. Think about it though — these professional fund managers have tremendous resources at their disposal and do the job full-time, and they still underperform. The odds are even more stacked against a non-professional.
Do yourself a favor and at least start with a basic building block like the SPDR S&P 500 ETF Trust.
This forgotten sector is ready to shine
Starting with an index-based mutual fund or ETF doesn't mean you have to limit yourself to only broad-market positions. You can — and arguably should — spice things up with other strategies like sector-based ETFs, which are a great way plug into more cyclical trends.
One of the more compelling sector ETFs at this time is the Industrial Select Sector SPDR Fund (NYSEMKT: XLI).
The market's recovery from the pandemic-prompted sell-off suffered early last year was led by technology and discretionary stocks, but investors should have been paying closer attention to industrial names like Honeywell International or General Electric (both of which are key holdings in XLI). Economist Chloe Parkins recently commented in a presentation for the Association of Equipment Manufacturers that “data is definitely pointing to a summer boom,” while the Institute of Supply Management forecasted earlier this year that the United States' manufacturing industry is likely to see 6.9% revenue growth in 2021. That growth outlook is great news for manufacturing outfits like GE, Honeywell, and their peers.
Sure, it may be boring, but that doesn't mean it won't bear fruit for investors.
The clean energy movement is finally on firm footing
Finally, if you're looking to plug into a megatrend but are no longer interested in hunting for a single stock, consider the iShares Global Clean Energy ETF (NASDAQ: ICLN).
There was a time when this wasn't a particularly great pick. Several trends are converging now, however, that set the stage for clean energy's long-term growth. Not only is it politically popular, consumers are sold on the idea too.
Deloitte's 2020 look at the country's energy market found that more than half of all consumers now say it's important that at least some of their power is provided by renewable resources. And the Department of Energy's Lawrence Berkeley National Laboratory just reported the country's power producers have cut their carbon footprint in half since 2005. Several major utility names, including Southern Company and Duke Energy, have committed to a power production portfolio that doesn't produce any carbon (net) within the next three decades, while the U.S. Energy Information Administration predicts the nation's usage of renewable energy will grow 15% this year and another 11% in 2022.
It's not just a sign of the times. It's also a sign that the technologies and know-how needed are not only available but financially viable. In other words, the renewable energy movement has graduated from being mere proof-of-concept to just making smart business sense.
The iShares Global Clean Energy ETF is a well-rounded way of tapping into the trend. Holdings include a mix of wind, solar, and natural gas holdings, and the fund offers a lot of exposure to foreign equities that might be tough for U.S. investors to buy on their own.
Just some ideas
These of course aren't the only exchange-traded funds worth considering — you may see other major trends worth plugging into via groups of related companies packaged together through an ETF.
Whatever the case, if the traditional stock market approach is doing you more harm than good simply because picking a market-beating basket of individual stocks isn't as easy as it looks, exchange-traded funds are a great, lower-stress alternative.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.