Part of my top down investing method is looking at the long-term chart of the country’s stock index. Since I like the U.S. market, I use the S&P 500 because it is the benchmark that U.S. mutual funds are measured against. Most market experts believe it is difficult to be successful at timing the market over the long run. Trying to sell at the market top and buy at the market bottom is impossible to time. Although, I agree over the long-term, sometime it pays to reduce some risk within your portfolio.
“Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.” ….Warren Buffet
The 20 year chart of the S&P 500 above illustrates three up markets and two down market trends. The current U.S. bull market of 70 straight months is the longest since World War II. I am protecting my portfolio by sector rotation into more defensive areas and increasing my cash position to take advantage of any market weakness.
In Investing Ideas for 2015 Part 1, I mentioned that I like the transportation sector and the consumer discretionary sectors which was also covered in my blog post “How to profit from falling oil prices” . So I will illustrate my research methods on another sector Healthcare.
The health care sector has long-term growth potential due to the aging population and investors considered it low risk. My research process is to check ETFs providers to compare their performances, fees and top ten holdings. All ETFs are not created equal, there are so many different choices. This is an example of what I found at the Spider ETF website and Blackrock I-shares.
|SPDR International Health (IRY)||I-Shares Healthcare (IYH)|
|SPDR Pharmaceuticals (XPH)||I-Shares Pharmaceuticals (IHE)|
|SPDR Healthcare Equipment (XHE)||I-Shares Medical Devices (IHI)|
|SPDR Health Care Services (XHS)||I-Shares Health Care Provider (IHF)|
At first glance you would think that most of the top ten holdings of SPDR Pharma (XPH) would also be in I-shares Pharma (IHE). I found only five companies that were in both ETFs plus they had different holding percentages. You can see from the three year chart below that both pharmaceutical ETFs have outperformed the S&P 500!!
The chart also illustrates that more money has been moving into this defensive sector during the past year. It also confirms that I should be more defensive in my investing choices.
Further research needs to be done on comparing another defensive sector and high risk. The one year chart below compares a consumer staples ETF (XLP) with a high yield U.S. bond ETF (JNK) and international high yield bond ETF. (IJNK) (high yield is basically junk bonds)
Another comparison that you can make would be a chart of a small cap ETF and the S&P500. Even though I like the growth potential of small caps, I am going to wait!
I am also going to wait on buying any tech ETFs because tech stocks are the most liquid and the big money players can sell them quickly if there is a market correction.
Although, I still like banks, I am worry about their exposure to the oil patch. The big unknown is which banks have large speculative bets in oil derivatives that could blow up into huge losses? I think that I need to do more research in this area. Regional banks may be a better possibility?
For my fellow Canadians, the number of Canadian ETFs are somewhat limited. To protect further declines in our dollar, I suggest ETFs that have a currency hedge built in.
What do you think? Where are you putting your investment dollars?
Next blog post: Investment Ideas for 2015 Part III – I am going to look at potential investment risks to your portfolio.