Are you looking for an investing strategy that can beat the market, but that doesn’t require you to keep constant tabs on a bunch of individual stocks? Join the club.
The thing is, this prospect is more plausible than you may have been led to believe. You just need to change your approach and mindset. Rather than perpetually hunting for what you hope will be “the next big growth company,” try plugging into big, theme-based trends and proven strategies via simple baskets of stocks known as exchange-traded funds (ETFs).
If that strategy sounds appealing, consider these three great ETFs, all of which have the potential to supercharge the growth of your retirement portfolio.
iShares MSCI USA Quality Factor ETF
It’s a bit off the beaten path, but if you want to give yourself a shot at market-beating long-term performance, consider the iShares MSCI USA Quality Factor ETF (QUAL 0.18%).
What the heck’s a factor? In investing terms, a factor is exactly what it sounds like it is — a preference or a priority. In this particular case, the preference is for quality.
Some qualities are subjective, of course, while others are objective. In the case of the iShares MSCI USA Quality Factor ETF, a strong return on equity, low leverage, and low earnings variability are the key attributes being sought out. The numerical standards, however, are still ultimately determined by humans making judgment calls about risk and reward, with a goal of limiting the number of stocks eligible for inclusion in the fund to a manageable figure.
This is not the attribute that makes the iShares MSCI USA Quality Factor ETF such an interesting prospect for your retirement portfolio though. Rather, what gives this ETF market-beating potential is that it looks beyond large caps and delves into the mid-cap world as well.
That matters. Although the S&P 500’s growth stocks have led the benchmark index to a superior performance over the course of the past 10 years, the S&P 400 Mid Cap Index actually has the stronger long-term track record. Since its inception back in 1991, in fact, the S&P 400’s return has more than doubled that of the S&P 500 despite the latter index’s more recent strength.
To be clear, most of the holdings of the iShares MSCI USA Quality Factor ETF are still large caps. But there are plenty of mid caps in the mix as well.
Invesco Solar ETF
Not every “next big thing” in the investing arena lives up to the hype. Meal kits, VR, and nanotech are just a few of the recent investing manias that went from sizzling to fizzling. Some industry-specific trends, however, are indeed the real deal.
Take solar power as an example. In the United States, the solar industry has ramped up its annual power production from less than 40 terawatt-hours (Twh) in 2010 to more than 1,000 Twh now, according to the Energy Information Administration (EIA). That’s just the beginning, though. The EIA anticipates that by 2030, the nation’s solar power production will be on the order of 6,000 Twh. In fact, this year, more than half of the growth of the United States’ capacity to produce electricity will come from solar sources, indicative of the magnitude of the trend. Similar solar growth rates prevail in nations around the world.
Given the lofty renewable energy goals that many countries have set for themselves, demand should be strong for the systems and technology that they will need to deploy to reach them, which bodes well for companies in the solar business. But which ones?
Naturally, we don’t know yet which of these stocks will benefit the most from the explosive growth of solar power. But with the Invesco Solar ETF (TAN 0.70%), we don’t have to know. We can simply gain exposure to all the major names in the business, plugging into the entirety of the trend. The ETF’s top holdings are First Solar, Enphase Energy, and SolarEdge, but there are more than 50 stocks in its portfolio, and none of them accounts for more than one-tenth of the fund’s total value.
In short, the Invesco Solar ETF is an easy way to tap into a complicated megatrend with a ton of long-term upside potential.
iShares U.S. Technology ETF
Last but not least, take a look at the iShares U.S. Technology ETF (IYW -0.89%) as a means of supercharging your retirement savings.
Like the Invesco Solar ETF (and even like the iShares MSCI USA Quality Factor ETF to a certain extent), this is a strategic holding that offers better potential returns than a broad-based index fund. It’s not a hyper-focused position or a trade with an expiration date though. Rather, it’s simply meant to offer exposure to the sector that has led the market for more than a couple of decades now.
The technology sector isn’t likely to lose its leadership role anytime soon, either. While finance, healthcare, services, materials, and utilities are all still important aspects of human existence, all of these areas are now reliant on tech, and made better by technological innovations. Banks aren’t going to go back to using pen-and-paper accounting. Hospitals’ records aren’t going to be de-digitalized. Computers are necessary to keep utilities’ power grids operating efficiently.
If anything, the world is going to become even more reliant on technology now that artificial intelligence is nearing an inflection point in terms of practical usability. AI-powered drug development, farming, and lending are all now realities, and other real-world applications are nearing the points where they will be refined enough for mass adoption.
There is a downside to owning this exchange-traded fund. Like most of the tech stocks it holds, this ETF is volatile. When it underperforms, it really underperforms.
That volatility is worth enduring for true buy-and-hold investors who can stick with this holding for the long haul, however. When the broad market has been bullish in recent decades, it has typically been led upward by the technology sector — and the market’s mood is bullish more often than not.
