Not all ETFs are destined for declines, even in a bear market.
It has been an incredibly rocky start to 2022, with major indexes off to their worst January since the dark days of the financial crisis in 2008. Part of the recent volatility is driven by big downward moves in major stocks like Netflix Inc. (ticker: NFLX) and a resulting negative sentiment for similar growth-oriented names. There’s also more general trepidation around how Wall Street will process rising rates, as well as the usual uncertainty around how long markets can rally amid the lingering impacts of the pandemic. However, exchange-traded fund investors who look beyond the standard index funds have been able to carve out tactical positions in areas of the market that have performed quite well so far — and are looking up even as we enter February with downward momentum in other areas of the market. If you’re looking for a short-term trade, consider these seven ETFs to buy for February.
ProShares UltraPro Short QQQ ETF (SQQQ)
Either as a hedge against short-term declines or simply as a swing trade to make money during a brief period of declines on Wall Street, ETFs that play the downside can be worth consideration. A host of these “short” ETFs have done very well in January but the supercharged SQQQ is worth calling out above many of the others. To begin with, it’s very liquid despite its specialty strategy and has about $2 billion in assets under management at present. Secondly, it’s leveraged, meaning it’s designed to go up even more than the market declines; specifically, SQQQ is benchmarked to three times the inverse of the daily movements of the Nasdaq 100 index. That’s why this fund is up a staggering 50% or so this year while the Nasdaq has fallen more than 14% in the same period. Just keep in mind that while this could be a wise short-term bet or hedge amid volatility, you will eventually get burned badly if and when the markets move higher — and SQQQ plunges in the opposite direction.
VanEck Oil Services ETF (OIH)
While technology stocks may have seen better days, one part of the market that has been pretty hot recently is the subsector of energy explorers and producers. That’s what this VanEck fund invests in, with a focused list of about 25 “upstream” stocks that are primarily focused on extracting fossil fuels from the ground. Considering crude oil prices are now comfortably above $80 a barrel, up from around $50 at this time last year, it’s perhaps not surprising to see this uptrend. Top OIH stocks at present include service giants Schlumberger Ltd. (SLB) and Haliburton Co. (HAL) — two contractors that are increasingly in demand as firms that control oil fields are eager to bring as much crude to market as they can while prices are strong. OIH has ridden this trend to more than 14% gains year to date, even amid weakness elsewhere on Wall Street.
iShares Global Energy ETFs (IXC)
While the aforementioned OIH is a focused play on U.S. service stocks, IXC is a more diversified way to play global energy trends with international exposure as well as a portfolio that is double the size with 50 stocks. These holdings include “Big Oil” giants such as Exxon Mobile Corp. (XOM), U.K.-based BP PLC (BP) and Shell PLC (RDS.A) to name a few. These diversified and integrated energy stocks also benefit from the rising prices in oil and gas, but allow investors a bit more stable way to play this trend via mega-cap companies with deep pockets and global operations. Shares of IXC are up about 12% this year, and looking good entering February.
Global X Copper Miners ETF (COPX)
Looking beyond energy, another class of commodity stocks that have been doing pretty darn well lately have been miners — particularly “base metals” such as copper and iron, which are riding the twin tail winds of continually rising materials prices along with recovering demand as companies around the world get back on track and move beyond the pandemic. This Global X ETF allows exposure to this specific trend, with top holdings for COPX including global mega-miner BHP Group Ltd. (BHP) as well as lesser known names like the mid-sized Canadian minerals firm First Quantum Minerals Ltd. (FQVLF). COPX is up slightly in 2022, standing out in an otherwise rough market, and may be worth a look going forward as well.
iPath S&P 500 VIX Short-Term Futures ETN (VXX)
This is perhaps one of the most complicated instruments on Wall Street, but one that may be worth a look in February for certain investors. This iPath offering is, theoretically, a way to profit from market volatility instead of individual companies. The vehicle is benchmarked to short-term futures on the CBOE Volatility Index, commonly known as the VIX, which is itself formulated based on S&P 500 index options. In other words, you’re making a derivative bet on a derivative product that is guessing future valuations for the S&P. Needless to say, things can get wonky in a hurry here as many things can affect short-term volatility. But the bottom line is that while the VXX is risky, it has paid off big time as the market has gone haywire in 2022 by delivering 33% gains while traditional stock investments haven’t held up.
KraneShares Global Carbon ETF (KRBN)
Carbon-focused KRBN isn’t one of the big moneymakers like other funds on this list, with a year-to-date return that is mostly flat. But considering the volatility elsewhere on Wall Street, that’s still saying something. And looking back a bit longer, this carbon ETF was one of the top performing ETFs of 2021 thanks to increased interest in sustainability around the world that is fueling upwards momentum for carbon prices. Benchmarked to cap-and-trade emission allowances in both the U.S. and the EU carbon credit markets, this is one of the most direct ways to play the rising cost of carbon dioxide emissions in the age of climate change. Regardless of whether the market retests its January lows or not, that megatrend won’t abate in the months ahead and should continue to lift this tactical ETF.
iShares Latin America 40 ETF (ILF)
As the name implies, this iShares fund is a bet on the potential expansion of 49 key publicly traded stocks in Latin America. At present, those corporations include Brazilian mega-miner Vale SA (VALE) and oil giant Petrobras Brasileiro SA (PBR) as the top holdings. These companies have naturally benefitted from the same materials price inflation that has lifted domestic commodity stocks, however it’s also important to note that returns in some sectors or regions of Latin America can sometimes be stronger than in developed markets thanks to a growing consumer class. Consider instead top holding America Movil (AMX), a Mexican telecom company that’s helping with 21st century digital connectivity in the region. This combination of inflationary benefits and emerging market growth has helped ILF tack on 7% so far in 2022 despite challenges elsewhere on Wall Street.
7 best ETFs to buy now:
— ProShares UltraPro Short QQQ ETF (SQQQ)
— VanEck Oil Services ETF (OIH)
— iShares Global Energy ETFs (IXC)
— Global X Copper Miners ETF (COPX)
— iPath S&P 500 VIX Short-Term Futures ETN (VXX)
— KraneShares Global Carbon ETF (KRBN)
— iShares Latin America 40 ETF (ILF)
