We talk a lot about individual stocks in the blog, today I'm sharing 5 'secrets' on how to use sector SPDR Exchange Traded Funds (ETFs) in your portfolio!
This information has made me lots of money in the stock market, it's a long post, but I can assure you that I'm giving you information other's charge lots of money to explain and I'm keeping it simple.
These 11 ETF’s divide the S&P 500 (SPY) sectors. (Visit the SECTOR SPDR ETFs website for more information! A few of the graphics came from their site as well)
There are pros and cons to using sector ETF's so identify you trading strategy and your narrative by asking yourself if you want broad exposure, or do you want a single stock.
1 Cons to consider about sector ETFs
These ETF’s will likely not move as quickly as an individual underlying since they contain multiple companies. This isn't always a bad thing, but it can be.
Let's look at XLF for a real life example of when I traded a single stock over the index. I posted this all in our discord, but I didn't explain the logic with as much detail as I am today!
These are the top holdings for XLF
During the "banking crisis" of 2023 I was purchasing JPM over XLF or KRE. I think JPM is best of breed in the banking sector, I didn't want exposure to other banks or financial institutions.
Look at the chart below of XLF combined with the orange line which is JPM stock.
JPM dipped just as much as XLF but it out performed XLF and as of today it's outperformed by almost 30%!
This single decision to buy JPM made me more money than my annual salary working at a corporate job. I wasn't trading questionable banks, I wasn't buying the sector ETF because I knew best of breed outperforms! Remember this, it will happen again, perhaps a different industry, but capitalize on this!
2 Pros of Sector ETFs
Here's an example of when I'd rather trade a sector over picking individual stocks!
XLY is consumer discretionary stocks, the top holdings are:
Consumer discretionary should drop as consumer’s start feeling the effects of rising interest rates, and possible inflation. You know the current environment we are in today! Instead of looking for individual retail, auto, hotels, apparel, etc.
I wanted broad exposure to the entire sector. These two shorts in the past 2 weeks paid for a beach vacation, and paid my utility bills for the next two months.
I took both of these trades in our discord, do you have a better understanding of why? This blog post explains why and how I use moving averages, so that’s how I “picked” my targets.
Do you realize how easy this thesis is to make on your own? People pay thousands of dollars for the information I'm giving you today. I've made $100,000's of thousands of dollars doing what I'm showing you.
No it doesn't always work, but you miss 100% of the trades you don't take.
3 Using Sector ETF's to hedge expensive stocks:
If you don’t own 100 shares of a META, and earnings are coming up and you want some downside protection, consider a put vertical in XLC. Do you see how XLC’s top holding is META?
This is a simple put spread on meta for earnings this week. IT would cost you 255 for a max profit of $245
This is similar protection in XLC that can make you $285. Yes, XLC will not move as much if META has a big decline, but look at your delta in both trades and the cost savings! Do you see how this is good for traders who have less than 100 shares or maybe want to speculate a bit?
4 SPDR ETs Pay Dividends:
Did you expect me to write a blog post and not mention dividends? Afterall these are a key part of my trading. I have a complete series on dividend stocks.
Sector ETF’s pay dividends! Just be aware there is an expense fee of .1%, but XLRE and XLE both yield over 3%.
Here's a chart on XLE
Side note: a possible trade idea as I think XLE is about to wave 5 higher! Maybe you could consider setting up a bull call spread!
The dividend is quarterly so next dividend isn't until June, at which point you could buy some shares before the ex-div sell a call? Buy Writes are less volatile than a single underlying. That is a plus, just realize the covered calls often doesn't have as much premium as a single underlying. For every positive there is generally a negative in the market. Smart people make the markets!
5 Using SPDR's to speculate on market cycles:
I’ve discussed how the market moves in cycles, so as money flows out of one sector, it generally flows into another sector. These individual ETF’s give you broad exposure to a sector, instead of all 500 companies in SPY.
There are many different cycles and theories, from seasonality, economic, political, even psychological cycles that you can study. Sector ETF's give you an easy way to make an educated guess and get the exposure you think will make you money.
You buy and sell (short) shares in these ETF’s but they have options! All normal strategies we discuss at Goodkidstrading for an underlying apply to the ETF, you can sell puts, trade spreads, the option aren’t always as liquid, but these are a good alternative in some situations.
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If you made it this far BRAVO! There is so much focus on individual underlying's that sometimes traders forget about the more boring ETF’s. I encourage you to build a watchlist of all 11 sector ETF’s, There are other ETF’s that should also go on this watchlist, I will cover that in a future article, so make sure you subscribe
I’ll see you next week here at the blog. I'll see you much sooner in our discord if you want to sign up!
Happy Trading Good Kids
These blogs take hours for me to create, I'm sharing information that has taken me years of experience and expensive coaching. If you enjoy this, perhaps you'd consider buying me a coffee. If you have feedback please let me know. I'm here for you!
None of this is trading advice, it's for your education in hopes you can make money in the market as I have done. I’m basically just some dude on the internet who’s been trading 2 decades, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!
