My Favorite Way to Use ETFs
I’m not a big advocate for exchange-traded funds (ETFs). I like to research individual stocks, track the prices and the trends and handpick my personal portfolio.
Sometimes it works for me … other times, I learn a few-hundred-dollar lessons.
But just like any other tool in your investor toolbox, there is a time and a place for ETFs.
If you’re not familiar with ETFs, they offer investors exposure to a basket of investments and are easily traded on public exchanges just like stocks. You can buy them through most discount brokers.
The fund objective can be based on an index, sector, commodity or other investment idea. Some are more actively managed, and you will see a higher management fee attached to those. If not diligent, these costs can easily eat into your gains.
• So how can you make sure you’re using ETFs to your advantage?
When I looked at the Weiss Ratings ETF screener, it currently showed only two “B+”-rated ETFs … and both are great examples of my two favorite ways to utilize ETFs to my advantage.
1. Use ETFs to safely expose your portfolio to more speculative lower-rated stocks.
Our first example is the Global X Lithium & Battery Tech ETF (NYSE: LIT). LIT invests in companies throughout the lithium cycle, including mining, refinement and battery production.
Lithium has the lowest density of all metals and is essential for rechargeable batteries for mobile phones, laptops and — most relevant right now — electric vehicles (EVs).
EVs are the future, there’s no doubt about it. But who will come out as the main player? Should you invest in a legacy automaker? How about a speculative company that’s gunning for Tesla? A company that makes EV chargers? Batteries?
If you play the waiting game, you could miss out entirely.
But ETFs, like LIT, offer a bit of it all.
Take a look at some of the fund’s holdings:
All of these companies are playing a role in the EV megatrend. Tesla (Nasdaq: TSLA) is a household name, but Albemarle (NYSE: ALB) makes specialty chemicals used in lithium batteries for EVs. Its compounds are also used in car tires and high-performance greases.
Livent (NYSE: LTHM) is also into lithium-ion batteries. And Sociedad Química y Minera de Chile (NYSE: SQM) is the world’s LARGEST lithium producer.
• But look at the ratings of those individual companies! I don’t think that I want to clutter up my portfolio with these individual stocks.
Plus, this is only a slice of the investments that LIT holds.
Shares of LIT are up 50% so far this year and up 88% over the past year. It currently pays out a slight dividend of 0.14%.
But here’s the important part: Its expense ratio is only 0.75% and it has a “B+” rating. This is a perfect example of using an ETF to safely gain exposure to more speculative, lower-rated lithium, battery and EV companies.
2. Use ETFs to gain exposure to companies with prohibitively expensive share prices.
A prime example here is the ProShares Ultra Technology (NYSE: ROM) ETF. This fund seeks results that correspond to two times the daily performance of the Dow Jones U.S. Technology Index.
Its portfolio includes companies involved in software, hardware communications, semiconductors, diversified technology services and internet services.
Look at a few of the fund’s top holdings:
One share of Microsoft (Nasdaq: MSFT) is $330, one share of Meta Platforms (Nasdaq: FB), formerly Facebook, is $335 and a share of Alphabet Class A (Nasdaq: GOOGL) is $2,919.
• But one share of ROM is only $121. Instead of having to choose one of these big-tech giants to add to your portfolio, you can get exposure to all of them … and then some!
This fund’s expense ratio is a little higher at 0.95% and it doesn’t pay a dividend. But shares are up 70% year to date and 104% over the past year.
As you navigate the realm of different financial instruments, try not to rule out any completely. Everything is just another tool in your toolbox. And sometimes an ETF just makes more sense than individual shares.
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