Tactical ETFs provide upside despite a down market.
The S&P 500 lost about 12% from Jan. 1 through April 30. And as we enter May we’re seeing continued market volatility, fears of runaway inflation and interest rate uncertainty. As a result, many investors are wondering whether it’s time to follow the old investor adage and “sell in May” to avoid what could be a continued bout of declines. However, all is not lost for exchange-traded fund, or ETF, investors. A series of very tactical ETFs have carved out profit potential in an otherwise hostile market, and could continue to deliver in the weeks ahead. If you’re looking for a place to put your money that isn’t the typical S&P 500 index fund, consider one of these admittedly smaller but highly tactical ETFs to buy now.
Invesco DB Commodity Index Tracking Fund (ticker: DBC)
In an inflationary environment, this Invesco ETF offers both a hedge against rising prices as well as a simple way for investors to capitalize on this trend. This fund contains a short list of the most popular global commodities, including energy goods like crude oil, metals like aluminum and grains like corn. And unlike the typical stock-based fund that plays producers, DBC is directly linked to futures contracts so you can have greater exposure to the actual movement of commodity prices instead of simply commodity-related stocks. With more than $4 billion in assets, this is a go-to way to play raw materials. And with returns of more than 30% in 2022 despite a down market, there is obvious appeal in this ETF as we enter May.
ProShares K-1 Free Crude Oil Strategy ETF (OILK)
Many investors have been looking to MLPs, or master limited partnerships, in 2022. Generally speaking, this special class of stocks consists of energy infrastructure plays that have upside potential thanks to the current inflationary environment, as well as generous dividends. The catch, however, is that the “partnership” part of MLPs makes for some cumbersome paperwork including a complex K-1 tax form that baffles many investors, and even some accountants. This ProShares fund takes that hurdle out of the picture by offering diversified exposure to oil-related partnerships in a form that doesn’t require you to get that dreaded K-1 form each year. It’s an appealing vehicle for this reason alone, but the 40% returns so far in 2022 make it look even better right now.
Invesco Dynamic Energy Exploration & Production ETF (PXE)
A focused list of about 30 energy stocks, this Invesco fund is concerned mainly with oilfield service and exploration stocks. And unlike some of the market-cap-weighted funds in the space that are biased towards big names like Halliburton Co. (HAL) or exclude integrated oil companies because they aren’t one-dimensional production plays, PXE takes a more active approach to tap into the very best performers based on current conditions. The tail wind for oil prices has been nice for the entire sector, but this active ETF has outperformed even that broad uptrend with an amazing 40% gain year to date thanks to components including Comstock Resources Inc. (CRK) Occidental Petroleum Corp. (OXY) and others.
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)
VXX, which is technically an exchange-traded note, isn’t a play on the stock market, exactly. Rather, it’s a bet on volatility itself. VIX is the ticker symbol for the CBOE Volatility Index, also known as the “fear index” by many traders. The VIX is linked to S&P 500 option trading and is therefore an indicator of future moves in the market. Therefore, this iPath fund is tied to short-term movements in that index, so it rises when traders start to worry about what’s going to happen in the immediate future. Given all the near-term volatility and uncertainty that persists, this continues to look like a wise bet as we enter May on shaky footing. If volatility continues, VXX could build on its already impressive returns of about 50% year to date.
Simplify Interest Rate Hedge ETF (PFIX)
Worried about the impact of rising rates? PFIX has you covered, with an approach that is tailor-made to profit from the changing market dynamics brought on by the current environment. The fund seeks to hedge interest rate movements stemming from rising long-term interest rates, and to benefit from market stress when bond market volatility increases. PFIX does this in large part through interest rate options, an investment vehicle that is complex and difficult for investors to access otherwise. The results are an amazing 55% in profits via this approach in 2022 so far.
Tuttle Capital Short Innovation ETF (SARK)
Some investors think that ETFs are a way to play only upside trends on Wall Street. Well, the tactical SARK ETF from boutique investment shop Tuttle is a way to “short” the market — and specifically, to bet against companies that had previously depended on sentiment around disruptive innovation to get ahead. If you think the bull thesis for purportedly transformational industries such as next-gen internet, electric vehicles, genomics and fintech seem stretched then SARK is for you — and based on its roughly 70% return year to date as these high-growth, high-risk companies have struggled, it may be worth a look in May as the market continues to struggle.
United States Natural Gas Fund LP (UNG)
The United States Natural Gas Fund is one of the best-performing ETFs of the year, thanks to its unique makeup. This natural gas is not tied to pipeline companies or exploration companies, and instead is designed to track the daily movements of natural gas futures contracts. This hard link to the commodity itself has resulted in returns of more than 50% year to date for two reasons: First, a general inflationary environment has created tail winds for natural gas; Second, because disruptions to European supplies amid the Ukraine war have placed a premium on U.S. natural gas exports. As war continues to rage and as inflationary pressures remain high, UNG should continue to do well for the foreseeable future.
7 best ETFs to buy now:
— Invesco DB Commodity Index Tracking Fund (DBC)
— ProShares K-1 Free Crude Oil Strategy ETF (OILK)
— Invesco Dynamic Energy Exploration & Production ETF (PXE)
— iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)
— Simplify Interest Rate Hedge ETF (PFIX)
— Tuttle Capital Short Innovation ETF (SARK)
— United States Natural Gas Fund LP (UNG)
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Update 05/03/22: This story was published at an earlier date and has been updated with new information.