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 (NYSEARCA: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.
This article is brought to you courtesy of David Fabian from FMD Capital Management.