It’s that time of the year again. That quarterly ritual of earnings season bliss where investors play the loveable game of Russian roulette with their favorite stocks. Will they beat? Will they miss? Will the CEO fire a bunch of employees to hit next quarter's guidance? Will they increase the dividend or up their share buyback plan?
So many questions that must be answered. The crazy thing is that even when all of the boxes are supposedly checked in your favor, it’s not a certainty of gains to come. How many times have we seen a stock smash all conceivable estimates and then sell off 5 or 10% the following day? Further evidence that the stock market isn’t logical, it is psychological.
Rather than playing “duck, duck, goose” or “beat, beat, miss” with your portfolio, wouldn’t a simpler solution be to hold a select group of diversified ETFs?
One of the reasons I love these tools is because they mitigate the pernicious effects of individual business risks on your nest egg. They help reduce the anxiety that many investors experience during earnings season as they await the news that will make or break their stocks. ETFs are a simple and effective way of getting exposure to the market without the stress of having to pick the right company to place your bets on.
I know what you are thinking though….
“Pssshhhh, Dave, please. I have a triple vol, iron condor, butterfly strangle on my Twitter position. I can measure my delta in basis points and know my theta decay down to the penny. I make money no matter what the stock does!”
Fantastic. You are much smarter than I am. Maybe you should sell that complex strategy to Goldman Sachs. You could be a multi-millionaire overnight and would never have to invest again.
Is there a downside to using ETFs? Absolutely. Risk is a two-way street. If you diversify your portfolio across more asset classes or individual companies, you reduce the opportunity of hitting it big on an individual stock. Last year alone we saw companies like Amazon.com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) soar more than 100%. Doubling your money in a single year is not something that is common in an unleveraged ETF.
One way to consider using these diversified tools is to replace multiple stocks in your portfolio with an individual sector fund. For instance, if you wanted to get exposure to both Apple (NASDAQ:AAPL) and Twitter (NYSE:TWTR) in a single vehicle you could purchase the Vanguard Information Technology ETF (NYSE:VGT) instead. In addition to those two stocks, VGT owns 378 other technology-oriented holdings and charges a minimal 0.10% expense ratio annually. Put simply, you own a wide swath of the tech sector for a miniscule fee.
The Bottom Line
There is no guarantee that an ETF won’t be marginally affected by earnings season to some degree. A series of misses from similar stocks or a group of market leaders will oftentimes lead to broad-based selling that impacts these funds. The opposite effect can also occur if positive effects lead stocks higher.
I’m not advocating that you replace every single stock in your portfolio with an ETF equivalent. However, for most investors, these vehicles represent a much easier way to access broad exposure or tactical themes. The added bonus is that you have far less at stake than individual stock owners during this quarterly ceremony.
Disclosure: FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.