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I have been flooded with emails from investors who are asking: If they could buy only one stock or ETF, what would it be?
The questions appear to stem from the decline in Alphabet’s GOOG, -0.31%GOOGL, +0.09% stock after the company reported great earnings but lower revenue per click. Alphabet has been a hot stock. Interestingly, most investors are not asking if they should buy Alphabet. Rather, they want to buy the best possible stock or exchange traded fund. Many are discussing popular alternatives such as Apple AAPL, +0.14% Facebook FB, +1.15% Amazon AMZN, +0.26% and Microsoft MSFT, -0.08%
Defining the “best”
Before I answer the question, we need to define what “best” is. We need to be clear in our objectives.
In my view, the “best” means something that is likely to produce the highest risk-adjusted return, i.e., return in excess of that commensurate with the risk taken.
Popular stocks are technically overbought and their valuations are stretched. For those reasons, they carry a lot of risk. However, the momo (momentum) crowd is in control of the market, and for this reason it makes sense to look at a momentum strategy. The risk can be lowered by buying an ETF because it provides diversification.
The ETF made for this situation
This momentum ETF, iShares Edge MSCI USA Momentum Factor ETF MTUM, +0.02%is made for such a situation. Yes, the exchange traded fund contains hot tech stocks like Nvidia NVDA, +0.08% and Advanced Micro Devices AMD, +0.47% but it also holds less popular tech stocks with better risk-adjusted potential, like Applied Materials AMAT, -0.04% Lam Research LRCX, +1.82% Broadcom AVGO, +1.07% and Texas Instruments TXN, +1.40% among semiconductor stocks. It also has lesser-known, but high-potential, software stocks such as Adobe ADBE, +1.06% AutodeskADSK, +1.62% and Veeva Systems VEEV, +0.18%
Please click here to see how well this ETF is diversified among sectors. For example, financials such as J.P. Morgan JPM, -0.94% Bank of America BAC, -0.08% and Morgan Stanley MS, -0.84% are hot; they are in this ETF. Home buying is booming; the ETF contains Home Depot HD, -0.19% and Toll Brothers TOL, -1.26% Among wireless carriers, T-Mobile TMUS, -0.42% and Sprint S, +0.12% may merge; the ETF contains both.
Please click here to see the top 10 holdings.
Diversify with different strategies
Please note that momentum is the only strategy in the momentum ETF. In my view, investors should also diversify among different strategies to lower risks.
A “parabolic” rise
There is now a 20% probability of a parabolic rise in the market. It such a scenario occurs, the momentum ETF is the one to own. Please see: “This stock-market signal says the rate of gains is about to pick up.”
When and how to buy
All investors are different with their own preferences. For this reason, The Arora Report provides three ways to invest: the good way, the better way and the best way. If following the best way, consider waiting for a pullback in the zone of $80 to $86.56 to start scaling in. If following the good way, and not having the patience to wait, our “buy now” rating at this time is “yes.” This means an investor following the good way can consider a very small position right here in the zone of $90 to $92.50 and plan on buying more when there is a dip.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.