ETF Market Strategies: Bargain Hunting
Added on 22 Feb 2011 | Author: Scott Goold | Categories: Trading, Trading ETFs | Keywords:
There are many different ways to approach the market, yet one of the most enduring pieces of investment advice remains, “Buy low, sell high.” To do this, you need to be able to pick bargains out of the market. For ETFs, this means digging for ETFs that are being undervalued or underappreciated by most traders.
You have to confine yourself to great deals with significant upside potential. You’re walking in the company of some of the market’s best known investors, as Warren Buffet is one of the biggest names associated with the bargain hunting strategy, and he’s not exactly small potatoes!
There are a number of ways to spot a real bargain, even in markets that are trading in sideways patterns. You want to look for ETF opportunities that let you get into market segments that are poised to do well, but for whatever reason they have been beaten down by the market.
How does this happen, anyway? Shouldn’t good companies always be fairly valued, given that the market discounts all available data? In a perfect world, yes. In the imperfect world where we actually live, all kinds of market irrationalities ruin the nice clean theories developed by economists.
For example, May’s flash crash on the DJIA chopped a neat 1,000 points off the overall market. Within that broader market crash, due to suspected trading errors and stop loss selling, there were some companies whose values plummeted to pennies, and though some of the trades were thrown out, the stocks still haven’t recovered today.
These browbeaten stocks aren’t bad, as their core operating fundamentals haven’t changed. To transfer this logic to ETFs, you would want to start checking out different sectors that are for one reason or another being overlooked by the market. You can check for low P/E ratios, newer ETFs thathaven’t gotten a lot of publicity, or ETFs who are a part of a fund family that is being beaten down in the marketplace and seeing their funds lose value as a result of the association rather than the core fundamentals.
Naturally, you want to steer clear of funds that are cheap because deep down, they stink. Do your research to be sure you know what an ETF holds nd what its potential truly is in the years ahead. In this way, you will be able to buy things from the bottom of the barrel confident that one day you will be able to sell them for top shelf prices.
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