In a liquidity fueled market rally, investors may find opportunities in targeted segments of the market, including potentially more growth-oriented sectors and exchange traded funds.
“We are coming from a period in which liquidity has been the major driver of asset prices,” Allianz’ chief economic advisor Mohamed El-Erian said on CNBC. “What the market is telling you today is, ‘You know what? That is no longer sufficient to maintain prices at a high level.’ You need something more, and that something more is fundamentals.”
Consequently, El-Erian argues that investors should focus on higher risk and less liquid opportunities that central banks cannot affect as easily, such as start-up disruptors and private equity.
“Don’t give up on some really exciting opportunities that are happening in the start-up world, in the private equity world,” El-Erian added. “There’s a lot going on, especially in tech.”
Investors who want exposure to some innovators in the tech industry may turn to small-capitalization tech stocks. For example, the PowerShares S&P SmallCap Information Technology Portfolio (NasdaqGS: PSCT), which is comprised of tech companies taken from the S&P 600 SmallCap Index, includes a 57.7% tilt toward small-caps and 42.3% to micro-caps.
The SPDR S&P Software & Services ETF (NYSEArca: XSW), which takes an equal-weight approach to software and services companies, holds 22.5% in micro-caps, 32.7% in small-caps and 30.7% in mid-caps.
Additionally, the PureFunds ISE Cyber Security ETF (NYSEArca: HACK) and recently launched First Trust NASDAQ CEA Cybersecurity ETF (NasdaqGM: CIBR) provide exposure to a growing cyber security industry as a response to increased scrutiny over cyber weaknesses amid some high profile hacks. [Cyber Security ETF Swells as Other Tech ETFs Dither]
PSP tracks the Red Rocks Global Listed Private Equity Index, which is comprised of 40 to 75 private equity companies, including business development companies, master limited partnerships and other vehicles that invest in, lend capital to or provide services to privately held companies.
PEX tries to reflect the performance of the LPX Listed Direct Private Equity Index, which consists of 30 global private equity companies. The component holdings will have a majority of its assets invested in or exposed to private companies.
Private-equity firms are known for raising cash and borrowing money to acquire a company in an attempt to turn around and re-sell them later for a handsome profit.
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.