Even in a bull market like the one for 2013, there will be some sectors that are out of favor with investors. That is simply the nature of investing. For 2013, it was gold, coal, and copper. Investors looking to profit from the rebound in these groups should consider the exchange-traded funds (ETFs).
There are many reasons for each sector doing poorly with investors, even though the Dow Jones Industrial Average was up more than 20 percent for 2013.
Investing in Gold
That the Dow Jones Industrial Average did so well is a major reason why gold did not. The yellow metal is a safe haven asset. Buyers purchase more gold when the economic outlook is gloomy. Gold and silver are preferred assets to paper money. When an economy is doing well, it is bullish for the stock market but bearish for precious metal investing.
Investing in Coal and Copper
For coal and copper, demand must increase again from China for those sectors to rebound.
As the largest consumer in the world of each commodity by far, coal and copper need China to be growing again. Coal and copper are needed for construction, manufacturing, power generation, and many other industrial end uses in the People’s Republic of China. When China was booming, so was the market for coal and copper.
Why Look at Sector ETFs?
It is very risky to pick individual companies in each sector as an investment.
What is better for investors is to look at the ETFs for each sector. An ETF is a security, like a stock, that holds a range of equities from that sector. It is much like a mutual fund in that it offers asset diversity and professional management. Like an equity, it can be bought and sold on the exchanges.
As to be expected, the ETFs for gold, coal, and copper were all down in 2013.
SPDR Gold Shares (NYSE: GLD) fell by nearly 30 percent over the year. Over the same period, the ETF for coal, Market Vectors Coal (NYSE: KOL), was off by more than 20 percent. iPath DJ-UBS Copper (NYSE: JJC) plunged over 10 percent for 2013.
Obviously, gold, coal, and copper are not going out of business, no matter how bearish the performance was for the publicly traded companies in 2013.
But many of the individual firms will, and have. That is the main reason to buy an ETF: the diversity that is offered. As an example, Market Vectors Coal is down around 21 percent for 2013. But Peabody Energy (NYSE: BTU), considered to be the best company in the coal sector, is off nearly 27%.
The wide range of assets owned by an ETF is a very appealing feature, indeed.
Other Sector ETFs
This has been proven with other sectors that rebounded. Shipping has been in terrible shape due to the Great Recession. But the exchange-traded fund for shipping, Guggenheim Shipping (NYSE: SEA), is up nearly 37 percent for 2013. It is the same story with the homebuilders ETF, SPDR S&P Homebuilders (NYSE: XHB), which rose more than 25 percent this year.
It will always be “buy low, sell high” in any asset class.
But the stock market offers a variety of ways to profit from that dictum. ETFs are a proven way to profit when an industrial group has done poorly. When the sector recovers, the ETF will rise in value. It happened with the ETFs for shipping and homebuilders, and it should in the future with those for gold, coal, and copper. Plus, you could always use a leveraged ETF to enhance your sector returns as well.
Do you invest in sector ETFs in your portfolio?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.