ETF STRATEGIES FOR AN UNCERTAIN MARKET: PART V — USING INDEX ETFS TO "BUY THE MARKET"

We’ve now arrived at the final installment of our five-part series on Exchange Traded Fund (ETF) strategies for an uncertain market. This week the focus is about using index ETFs to essentially "buy the market." One of the best things about ETFs is that they allow you to get exposure to various parts of the market, including the major market indices.

ETFs started becoming popular during the 1990s, when investors who wanted exposure to the tech sector realized that it was a lot easier, and a lot cheaper, to buy the Nasdaq 100 via the QQQQ than it was to buy into a mutual fund offering the same exposure.

Investors now had a vehicle that they could use to take advantage of the tech boom. That investment vehicle was transparent, objectively managed, easy to trade and had a minute expense ratio when compared to traditional tech mutual funds. It’s no wonder that the QQQQ, or Qs as they are commonly referred to, are one of the most heavily traded securities on the market today.

As you can see by the chart above, the Qs have been in a steep decline since early May. However, since mid-July the tech-heavy index (which includes the largest 100 stocks traded on the Nasdaq Composite) has trended higher. In fact, early this week the Qs broke above their 50-day moving average and are on their way toward the 200-day average. If you want exposure to the tech sector without having to pick individual stocks or without having to pay the high fees traditional mutual funds levy, the best way I know of is to buy the Qs.

Another great way to "buy the market" using ETFs is by getting exposure to perhaps the best measure of overall market strength, the S&P 500 Index. Through the S&P 500 SPDRs (SPY), commonly know as "spiders," investors can basically own the 500 largest publicly traded companies in one easy, convenient and inexpensive ETF.

SPY is a proxy for the health of the entire stock market. If you suspect the market at large is headed higher, one of the easiest ways to take advantage of that suspicion is through an allocation to the Spiders. Right now, the SPY is trading above both short- and long-term moving averages. As the S&P 500 index approaches the 1300 mark, it could mean the beginning of a sustained uptrend in stocks.

For investors who like to expand their exposure to companies with a little less bulk than just the largest 100 Nasdaq stocks or the 500 biggest public companies, there’s an ETF tailor made for you. It’s the iShares Russell 2000 Index (IWM). This ETF allows you to buy into the small-capitalization sector of the U.S. equity market.

IWM invests in approximately 2,000 of the smallest capitalization-weighted companies in the Russell 3000 index. By nature, this index tends to be much more volatile than both the Qs and the Spiders. You can experience a lot more downside when investing in these smaller stocks, but you also can get a much bigger push to the upside as these stocks will tend to move faster than their larger brethren.

At my Successful Investing service, we are watching all three of these ETFs very closely. In fact, the rebound in stocks during the past two days has pushed these three barometers of the market to attractive levels. We currently don’t have an allocation to these ETFs but the market is close to giving us the go ahead to get back into equities. When the time is right, you can bet that we’ll be recommending you buy the market via these three index ETFs.

Don’t miss out on our next Buy signal. Find out when, and how, we’ll use ETFs to take advantage of the next opportunity in stocks by clicking here:

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