Profit Like a Venture Capitalist with Exchange Traded Funds


My father, who worked in finance for over five decades, used to say, "There are always good buys in the stock market."

It is easy to see that statement is true, as some sector or company is always out of favor with investors. What can be difficult is finding the stock that will eventually rise again.

Continue Reading Below

A venture capitalist-type approach can be deployed, which entails buying a wide range of equities and hoping a few post huge gains to make up for the laggards. Buying exchange traded funds (ETFs) for a sector that is down is a far better strategy for an individual investor.

ETFs are securities that track an index, commodities, or some grouping of assets.

There are many advantages for the individual investor in buying one sector ETF rather than a wide variety of individual stocks in that industry. It is cheaper, there are professionals doing the research and you don't have to worry about management screwing up a single company. If foreign assets are involved, ETFs can provide protection against currency fluctuations.

Even with the Dow Jones Industrial Average and the Standard & Poor's 500 Index soaring this year, there are still many industries that have been beaten down.

This can be seen by the performance of ETFs for various sectors. As an example, "The War on Coal" of the Obama Administration has the ETF for coal, Market Vectors Coal (NYSE:KOL), down almost 20 percent for the year.

Investing in individual coal stocks can be treacherous: Patriot Coal filed for bankruptcy last year. Peabody Energy (NYSE:BTU), probably the best company in the sector, is off by more than 25 percent in 2013.

But the entire coal industry will not go bankrupt, which should have Market Vectors Coal soaring again.

That has happened with other industry ETFs. The shipping industry is in terrible shape. Frontline Ltd (NYSE:FRO) is now around $2.30: in 2008 it was over $70 a share. Guggenheim Shipping (NYSE:SEA), the ETF for the group, is now around $20. In 2010, it was close to $30 a share. But for 2013, Guggenheim Shipping has risen by more than 30%.

There are always sectors that fall and then rise again: that is what makes a market.

In 2011, the ETF for banks, PowerShares KBW Bank (NYSE:KBWB), was trading for well under $20. Now it is over $30 a share. It has increased in value more than 30% over the last year of market action.

Venture capitalists can be very intelligent people.But buying ETFs is smarter for an individualthan investing like a venture capitalist. The same gains are made at a far lesser cost. ETFs are the great equalizer in investing for individuals when it comes to profiting from sectors that are in a bear market.

(c) 2013 Benzinga does not provide investment advice. All rights reserved.