This is a question I’ve received a lot lately, so let’s take a moment to review what I think about Exchange Traded Funds (ETF) right now.
In a nutshell, ETFs make sense when you’re in the early stages of a bull market and you’re seeing a broad based rally. We did have that for the first six months of this year. But now that the market is losing breadth and power, we’re seeing a much smaller proportion of stocks beating the market.
So the market is tightening up and while this helps our stock picking strategy, this hurts the ETF sectors. If you’re interested in ETFs, I think it makes sense to stick with larger cap, bigger ETFs like SPDRs and iShares. The smaller cap ETFs are becoming a bit too difficult to manage at this time.
In my opinion, the ETF industry has caused some of the bubbles we’ve seen in the stock market this year. The bubble that burst in Tesla (TLSA) was caused by the QQQ—the NASDAQ 100 ETF. I’m not anti-ETF but I do think some of them are getting too frothy and difficult to manage.
So my recommendation is to stick with a solid stock picking strategy. Stick with companies that are posting robust sales and earnings growth quarter after quarter. Diversify across several different sectors and be careful with high dividend stocks, which have become more volatile of late. And above all else, continue screening your positions in my Portfolio Grader tool. These tips will help you build a stock portfolio with significantly higher potential than your run-of-the-mill ETF.