The Best Way to Play Market Trends - Weekend Wisdom

This year's performance for the S&P 500 has been pretty solid, even with the bout of volatility lately. In fact, the benchmark is up over double digits this year, making the recent slump pretty forgettable.

But depending on your sector choices, you may have missed the gains entirely. Consider how two of the 2014 losing sectors have performed this year when compared to the solid return of the S&P 500. The broad energy sector is down 2% year-to-date, while the consumer discretionary space has added just 4% in the same time frame.

Yet while these two have struggled, health care and utilities have been all-star performers in 2014. Both have risen by more than 20% (and doubled the overall market) this year, further demonstrating that picking the right sector is absolutely crucial for top performance.

What's Next?

Yet, even if you identify the right sector, there is the enormous problem of picking the correct stock in the industry that will outperform. Take for example the biotechnology world, as our classification system has close to 200 stocks in the medical-biomedical/genome industry.

In this group, close to two dozen stocks have lost more than 70% this year, while a similar number have seen gains approaching 100% (or more) so far. So even if you were correct in your decision to bet on the biotechnology sector in 2014, you may have picked a dud and lost out on some very solid returns.

Using the Zacks Rank is one way to narrow down the list, but even then there are over 50 stocks in the industry that have a 'Buy' Rank right now. So how do you choose?

The answer is, you don't!

If there is a clear trend present, the best way to play it is to buy the whole sector. Fortunately with the rise of the exchange-traded fund industry over the past decade, this is now pretty easy for the average investor to do. It eliminates the need to bet on a single stock in a rocky industry.

More . . .

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4 Explosive Market Trends

One is poised to surge over the holidays. Another is a region primed to turn on a big announcement. A third is gathering momentum as global tensions continue to rise. A fourth is already rolling toward the very top of the Zacks Industry Rank.

Most investors are overlooking these trends, and that makes them even more potentially lucrative. Important: Your chance to discover them ends Saturday, November 22.

See 4 potential booms right now >>

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In our biotech example from above, there are actually several biotechnology ETFs currently on the market, and all five (that have been around for the whole year) have gained more than 25% so far in 2014.

But buying the trend doesn't start or end in the biotechnology world, as many other markets have seen exceptional performances this year too.

Difficult-to-Reach Markets

This is especially the case in hard-to-tap emerging markets and commodities. Take for example coffee and India, which have outperformed in markets that are pretty hard to get into without exchange traded products. Coffee is up over 60%, while several India ETFs are posting YTD gains in excess of 40%.

Will Any ETF Do?

Unfortunately, it isn't quite as simple as picking the first ETF you see that offers exposure to the trend. Even when targeting the same sector, there can be vast differences between ETFs, so it takes a keen eye to select the right one in order to play the trend properly.

A great example of this is in the industrial space, as selecting the industrial momentum ETF would have yielded you a loss of about 0.6% so far this year. However, by focusing on an equal weight fund instead of targeting the industry, your gain in the same time frame would have been nearly 10%.

Investors also see a similar trend in some foreign markets, which is particularly the case in Europe. Most broad European funds are down nearly 10% so far in 2014 as a weakened economy and a crumbling euro have dragged down shares across the continent. However, if you selected a hedged product instead (one that removes exposure to the euro), you would actually be seeing a gain so far this year.

Clearly, even if you are in the right direction, an incorrect choice in terms of which ETF to pick can cost you dearly.

Where to Find the Best ETFs Now?

Even though ETFs have become more popular, many investors regard the Exchange-Traded Fund world as a foreign land, and with close to 1,700 products in this market, there are a paralyzing number of choices at an investor's disposal.

And yet the power of ETFs to tap a booming industry without the added risk of putting your dollars into the wrong company in that industry is too compelling to ignore.

That is why I suggest you look into Zacks' newest portfolio service that I am managing. It distills those nearly 1,700 funds down to less than a dozen that are primed for outperformance over the next few months. Today, I encourage you to take a close look at our ETF Trader.

It will close again to the public on midnight Saturday, November 22, but you can get in now and see our ETF trades, and be first in line for two that I am posting Monday morning. In fact, for the next 30 days, you can share all of its real-time buys and sells, plus all of the other Zacks portfolios for the total sum of just $1.

See the ETF Trader Before Saturday's Deadline >>

Good Investing,

Eric

Eric Dutram is Zacks' authority on Exchange Traded Funds. He monitors trends and issues buy and sell recommendations for our newest portfolio, the Zacks ETF Trader.

 

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