ETFs Can Help You Identify Perfect Stocks

Article was originally posted here

Last week I wrote about the “wisdom of crowds” and how you can apply this important concept to your investing.

Here’s a quick recap…

There are dozens of competing investment strategies in the stock market.

Every fund manager, strategist and, yes, even newsletter writer has their own version of a better investing mousetrap.

Some swear by value investing, worshipping at the altar of Benjamin Graham and Warren Buffett.

Others prefer the rapid gains promised by growth investing, inspired by the likes of William O’Neill, the founder of Investor’s Business Daily.

Still others rely on the promise of steady income to maximize their gains, best achieved by investing in the Dividend Aristocrats.

What do the proponents of these diverse approaches have in common?

Each believes they have uncovered the secret to cracking the market’s code.

My investment philosophy, in contrast, is eclectic.

There are times when value investing fares best. Other times, it’s momentum players who make the most money.

In short, I believe each investment strategy has its day.

That’s why I prefer to combine the insights of many diverse investment philosophies in a single investment portfolio.

Which is exactly the reason I developed the
Oxford Wealth Accelerator Strategic Portfolio
.

This
Strategic Portfolio
consists of 10 competing investment strategies – each of which has a track record of outperforming the S&P 500 over time – but in very different ways.

I like to think of it as a “portfolio of portfolios,” thereby applying the wisdom of crowds to investing.

But I wanted to take this fundamental insight one step further – and apply it to picking individual stocks.

My thinking was this: If the same stock makes it into the portfolios of a value investor who looks for cheap stocks…

A momentum investor who chooses a stock purely based on technical analysis…

And a growth investor who expects the stock to be a 10-bagger…

The likelihood is much higher that the stock will be a big winner.

But first I had to find a way to identify the holdings of each of these distinct strategies.

Here I ran into a problem.

Large mutual funds are required to disclose their holdings to the SEC on form 13F 45 days after the close of a quarter. By the time I could get my hands on those 13Fs, I’d be looking at stock purchases that may have been made more than four months prior to the filing.

But I didn’t give up…

As it turns out, there are investment funds that make their holdings public on a daily basis: exchange-traded funds (ETFs).

By tapping into a database that collects and collates the underlying holdings of ETFs…

I could see which stocks specific ETFs held as recently as a day ago.

And here’s the surprising lesson I learned:

The investment philosophies of each ETF were diverse, independent and sometimes even contradictory.

Yet it was remarkable how often they invested in the same stocks.

Sometimes these stocks were household names.

Sometimes they were stocks I had never heard of.

In either case, knowing which stocks the smart money was investing in gave me a tremendous edge in picking individual stocks.

Now I am able to track about 35 different ETF-based investment strategies every day.

At this point, you may be curious…

What is the top-performing investment strategy of 2019 so far?

It’s the Invesco S&P Spin-Off ETF (NYSE: CSD), which is up 17% over the past month. It invests exclusively in firms spun off from a larger parent. The idea is that investing in companies with a singular focus will lead to market-beating returns.
And what’s the single most popular stock across the 35 ETFs I track?

It’s payment processor PayPal Holdings (Nasdaq: PYPL). As a spinoff from eBay Inc. (Nasdaq: EBAY), it’s also the third-largest holding in the Invesco S&P Spin-Off ETF.

Chances are you haven’t given much thought to buying an ETF that invests in spinoffs… or to buying PayPal stock.

But as it turns out, a lot of the “smart money” is doing just that.

And it took the wisdom of crowds to uncover that insight.

Good investing,

Nicholas

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