Over the last several months it has been more and more popular to take speculative positions in fast moving stocks to try and reap quick profits. After the majority of broad-based indices appear to have plateaued somewhat in 2014, aggressive investors are starting to look elsewhere for fast returns.
The fuel cell maker Plug Power Inc (PLUG) is the latest trader obsession that has posted stratospheric gains for consecutive weeks now. The stock started the year below $2.00 per share and traded as high as $11.72 before a 40% single day plunge caught many late adopters by surprise. The company has become a media darling for its rapid price movement, huge volume spikes, and dislocation from traditional fundamental analysis.
There are a number of risks investing in small speculative companies which is why they so often lead to big gains and horrific losses. One of the best ways to mitigate the business risk of a single company or concentration of a single sector is to consider a more diversified investment vehicle such as an exchange-traded fund.
I love ETFs because they are transparent, liquid, low-cost, and diversified. Many of the most well-known ETFs, such as the SPDR S&P 500 ETF (SPY), are geared toward moderate or conservative investors that want to keep pace with an index or specific sector. However, there are a few aggressive options that speculative investors will love as well.
A relative newcomer to the ETF space is the Renaissance IPO ETF (IPO) which is designed to provide investors with exposure to newly issued public companies before they are included in more traditional broad-based indices. The IPO market has really heated up over the last several years as more companies are taking advantage of bullish investor momentum amid record issuance.
This ETF has the ability to select a new public company for inclusion in its portfolio after only 5 days of initial trading history. That means that it can potentially access new business models and economically significant companies very quickly after they are brought to market. The fund currently has 60 holdings spread amongst a variety of sectors and market cap styles.
Another ETF that is perfect for aggressive investors is the iShares Micro-Cap ETF (IWC) which has over $1 billion invested in 1,300 companies with market capitalizations ranging between $50 and $550 million. In 2013, this ETF gained more than 45% which significantly beat both SPY and the small-cap iShares Russell 2000 ETF (IWM). Last year, SPY gained 32.15% and IWM jumped 38.8%.
The wide diversification of a fund like IWC can be either a blessing or a curse depending on your outlook. With 1,300 holdings, the success of any single underlying company will likely have less of an impact on total performance. However, on the flip side you are more insulated from the business risk of a single stock meaningfully declining in price.
Another other way to go is to take a position in a beaten down sector that you think will make a meaningful bounce in a short period of time. Last year, the Guggenheim Solar ETF (TAN) gained 127.82% and has already jumped out of the gate with an increase of more than 35% this year. That type of strength is almost unheard of in an unleveraged and diversified investment vehicle. It’s worth noting that TAN is more concentrated than most ETFs, with exposure to just 29 global companies that are engaged in the production and installation of solar products.
The Bottom Line
Aggressive ETFs offer ways to get tactical exposure to a specific theme while reducing the risk that a single company will have an adverse effect on your portfolio. While they aren’t for everyone, they do offer unique strategies that you should be aware of when building your asset allocation. They may be perfect for accessing a targeted area or adding alpha over a more traditional benchmark.
If you do decide to invest in these areas, I recommend that you do so with a risk management mindset that takes into account the potential for heightened volatility. Having a disciplined trading approach with a stop loss strategy can help you reduce the risk of a significant drawdown if the market decides to head lower this year.