Although many are attune to the fact that all uptrends endure downtrends to some degree, not everyone gives thought to the less-talked-about type of correction in the market: a sideways consolidation through time.
Not all corrections happen through declines in price. In fact, a lot of the time the market may be busy correcting sideways, or consolidating through time, without much attention to the media. It is during these slow-moving, range-bound periods that opportunities may emerge.
Here are three ETF strategies for making the most of your capital during market consolidations through time:
1. Maximize Yield
One way to make the most out of periods when the market is oscillating between a tight support and resistance range is to overweigh higher-yielding securities. Two of the most basic ways to go about maximizing yield (i.e., covering your equity and fixed income bases) are focusing on dividend-paying stocks and junk bonds respectively.
Ways to play include:
The key caveat here is that high-yield generally corresponds with more risk. Don’t confuse a sideways correction in the market with a “safe period.” If you’re going to maximize yield, be sure to do so while keeping your risk exposure in check.
2. Jump to Ex-US Markets
When major U.S. stock indexes are slouching or chugging along sideways, there’s likely capital flowing into other markets around the globe. The advent of ETFs has brought whole new meaning to the adage “money never sleeps” for retail investors who can now also take part in opportunities outside of domestic markets with ease, transparency, liquidity and cost-efficiency for that matter.
Ways to play include:
3. Look for Sector Rotation
Often times when the market is correcting sideways through time, there is a sector rotation unfolding underneath the surface. Bull markets persist for years on end because sector, industry and asset class leadership rotate constantly across time frames.
Two Other Considerations
Another way to maximize your return during sideways periods is to focus on yourself as an investor, not just on your portfolio. For starters, consider these two tips:
- Accomplish more by doing less. One of the fundamental pillars to successful long-term investing is patience, and like most things, it’s easier said than done. By resisting the urge to react to each and every correction, be it about price or time, you may actually be increasing your odds of success over the long haul.
- Get educated about option strategies and learn how to generate income on your existing positions. Look to the covered-call strategy for starters.
The Bottom Line
Sell-offs, or corrections, are an important part of the stock market cycle, as every bull-run naturally needs a break before continuing higher. However, if you’re looking to put capital to work, there’s no reason to sit idle during sideways consolidations in the market. This article is a reminder for you to consider the multitude of ways in which ETFs can help beef up your portfolio’s returns when the market is busy correcting through time, and not just price.
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