Burnt by the market? Try these 3 passive investments instead



Whether you’ve been an investor for 30 days or 30 years, you know that at least one thing is true: Trying to beat the market by constantly trading stocks in search of the next big thing is hard to do. Suggestions that over 80% of true short-term traders lose money seem outrageous – until you actually try to do so. Then the metric makes sense.

The stock market is simply too unpredictable to guess in the short term. The people who make the most money in this game are the ones who let most of their holdings simmer in the long run. Indexation remains the best suited strategy for most investors.

With that as a backdrop, here’s a look at three completely passive investment vehicles that get around the pitfalls of short-term trading. All three are even exchange-traded funds, which lend themselves to a long-term mindset.

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1. iShares Core S&P Mid-Cap ETF

Anyone who has heard the sermon on indexing is probably familiar with the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) is the most popular way to employ this strategy – and with good reason. The fund not only represents the best-known benchmark in the market, but also reflects around 80% of the US investment market.

But an ETF based on the S&P 500 is not necessarily the best way to tap into the continued natural growth of the market as a whole. Mid-cap stocks, as measured by the S&P 500 Mid Cap Index, actually outperform large-cap stocks, if given enough time. Since 2000, the IShares Core S&P Mid-Cap ETF (NYSEMKT: IJH) nearly doubled the gain recorded by its large-cap counterpart.

SPY graphic

SPY data by YCharts.

When you think about it, this disparity makes sense. While large caps are generally well established companies, this foundation usually means their years of highest growth are behind them. Mid caps, on the other hand, are often at their proverbial sweet spot in terms of growth: before full maturity, but after wobbly startup years that many companies fail to survive.

2. PowerShares DB Commodity Index Tracking Fund

While most investors start out and stick with stocks of conventional companies in their portfolios, stocks aren’t your only option. You can – and should – also own physical assets, like gold, grains, or crude oil. These commodities go up and down just like corporate stocks, but not in parallel with the broader market.

Problem (s): Owning real commodities can be difficult to do, and even when possible, investors may find themselves forced to choose certain commodities over others at the worst time to do so.

The PowerShares DB Commodity Index Tracking Fund (NYSEMKT: DBC) solves both problems. This exchange-traded fund is designed to reflect the German Bank IQ Optimum Yield Diversified Commodity Index, which simply buys and holds stakes in the 14 most important commodities in the world, such as gold, oil and grains mentioned above.

This still does not prevent temporary setbacks. Indeed, this ETF can sometimes tumble as much or more than the stock market indices. It usually does this at different times. But this commodity basket also doesn’t tempt investors to try and select what looks like emerging trends from individual commodities, which is just difficult to do very well for a very long time. It’s meant to be a kind of buy and hold position.

3. ProShares S&P 500 Dividend Aristocrats ETF

Finally, add the ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT: NOBL) to your list of passive investments to consider if you’ve decided that a more active stock picking approach isn’t working well enough for you.

As the name suggests, the ProShares S&P 500 Dividend Aristocrats fund owns stakes in the 65 stocks of the S&P 500 Index that have increased their annual dividend payments every year for at least 25 years. The returns corresponding to these dividends are not necessarily impressive, but they are clearly reliable and progressive. It is something, especially if you are willing to sit on these names for the long haul.

Mutual fund company Hartford calculates that just over 40% of total market gains since the 1930s have come from dividends. This income can reduce the sense of oppression you get when one of your non-dividend paying stocks implodes, making them much easier to hold onto (as you should) even in times of turbulence.

Their income aspect is not even the whole benefit of holding proven dividend payers. Equally important is the fact that the same consistency that supports this continued dividend growth also means that dividend aristocrats are generally shielded from economic turmoil. This in turn means that the market is a little less likely to beat these stocks when the going overall turns for the worse.

And the numbers confirm this idea. Data The morning star indicates that while Dividend Aristocrats only account for 91% of overall market gains, these stocks also suffer only 79% of broader market setbacks. It is a compromise that most investors can live with.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.



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