They hide it well, but the financial wizards on Wall Street do not have your best interests at heart. If trading on margin can leverage potential rewards, then they give you three – and even four – times leverage to super magnify risks. And if diversifying a portfolio with a mutual fund is good, they give you mutual funds that invest in other mutual funds.
The common thread? No matter what the market does, they collect their fees. They’ll recommend all types of stocks and ETFs, regardless of quality, just to collect that commission.
And that includes exchange-traded funds (ETFs) – those stock-like mini-mutual funds that are supposed to give you all of the benefits of diversification with lower cost. Yes, ETFs, which are now among the most widely traded instruments on U.S. stock exchanges.
Money Morning Options Trading Specialist Tom Gentile has had enough of their games. And he pulls no punches because he calls ETFs “absolute trash!”
Don’t tell that to the big ETF sponsor companies that make a mint on your enthusiasm.
Here’s a little secret. There are about 6,500 stocks trading on U.S. exchanges, but there were 1,756 ETFs trading here in 2017, according to FactSet. That’s about 3.7 stocks for each ETF.
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But just over half of the money dumped in by unwitting investors went to just 20 of them. Talk about a crowded trade. And worse, it only seems as if you are diversified when you own them.
What happens when everyone wants to sell? The exit doors cannot be wide enough to allow for a smooth retreat, so big drops are almost guaranteed in turbulent times. Just ask anyone who owned ETFs during the “Flash Crash” of May 2010.
If things don’t implode, you are left with an investment that could, maybe, possibly give you a 10% or 15% return over the next decade. Maybe that’s why everyone thinks they can beat the market. The bar seems pretty low.
But with 6,500 stock here and 25,000 worldwide, where do you begin to look for the real winners out there?
You need some way to sift through the junk to find the gems.
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Gentile developed a proprietary screening method designed to uncover the top 10 stocks with the greatest potential for gains. Here’s how he does it:
First, he looks for only the stocks with options that trade in penny increments, typically within a $0.05 bid/ask spread. That narrows it down to around 250 stocks in total.
Next, he turns the system to look for patterns in not only stocks, but other markets such as gold and oil. These patterns repeat over and over again with regularity. Spotting them by eye is not easy, and it certainly is time-consuming.
But if you want, you can further whittle down the list by looking for stocks with:
- Prices over $100 per share.
- Moves over 1% per day, on average, between the high and low.
- High correlation to the market.
What you should have at the end of this exercise is a list of stocks that have a good options market, trade at a significant stock price where options offer great leverage, and show enough movement each day so that the options will really have some juice.
Basically, you weeded out the junk, the dead, and the broken, and that is a great way to beat any ETF – all the way to the bank.
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