Probably one of the most-asked questions I receive is, “why don’t you recommend any ETFs?”
As you may know, exchange traded funds, or ETFs, are essentially indexes. An ETF is a bucket of stocks that can track the major indices, a particular sector or even gold and commodities. ETFs really hit the scene back in 2009, when everyone was trying to track the upward movements of red-hot sectors. At that time, stocks were trading in packs, which made ETFs a good way to scoop up extra profits.
But today, individual stocks rarely move in lockstep with their sectors. That clearly negates the core benefit of an ETF investment strategy. I mean, why would you invest in an ETF that includes stocks moving in opposite directions—both of which impact the overall return of the ETF—when you could buy shares of a fundamentally superior stock with the potential to hand you double- and triple-digit gains?
Personally, I’ll choose an individual stock over a watered-down sector ETF every time.
If the profit-potential difference between individual stocks and ETFs isn’t enough to convince you, let me take you on a little trip down memory lane. Rewind to just three years ago, to August 24, 2015…a day when the stock market experienced an “intraday flash crash” that had devastating consequences, and it was all because of ETFs.
If you recall, nearly 1,300 stocks dropped more than 5% when the stock market opened on August 24, 2015. The NYSE immediately stopped trading these stocks, but ETFs continued to trade. And therein lied the problem. ETF specialists had no idea what the underlying value of these stocks was or where these stocks would reopen. So they slashed bids on ETFs by nearly 35%.
Apparently, the ETF specialists only dropped their bids by 35% because of the five-minute flash crash back in May 6, 2010. On that day, all of the trades that dropped 40% or more were reversed as if they never happened. So the ETF specialists knew that they should not cross that 40% threshold, and they just “picked off” everybody by 35% intraday instead.
And no one was immune to the massive intraday sell off three years ago, not even big, well-respected ETFs with high Morningstar Ratings and a nice dividend yield. In fact, the iShares Select Dividend ETF (DVY) took a 34.95% intraday hit on August 24, 2015.
The moral of the intraday flash crash story: There are some very big flaws in ETF trading, and stop loss orders cannot protect you from intraday ETF and stock price anomalies.
Fast forward back to present day, and I’ll say it again: We remain in a very selective market that is favoring a few key sectors and individual stocks. Right now, more domestic small- to mid-cap stocks are dominating the scene. And that’s where I would recommend you focus your time, energy and hard-earned cash.
The real money is being made in select individual stocks, and my Portfolio Grader system can help you uncover which stocks have superior fundamentals and the potential for market- and ETF-beating returns. Visit my Portfolio Grader website today, and you’ll immediately uncover the hottest sectors and red-hot stocks in these sectors.