Is a bull market on the way for 2023? Some investors think so, largely due to the strong start to the year (the so-called January Effect). Others argue that more pain is on the way, given that inflation is still trending high and central banks remain committed to further rate hikes.
The truth? I have no idea. My crystal ball isn’t working this week, so your guess is as good as mine. Personally, I’m committing to what I’ve always done regardless of bull or bear markets: investing consistently, re-balancing periodically, and always staying the course.
That being said, if you handled the volatility of 2022 well and are willing to take on greater risk for the potential of higher returns, then I have some ideas for you. We won’t be picking single stocks today. Rather, to diversify and minimize risk, I have two exchange-traded fund, or ETF, picks instead.
The Nasdaq 100
We all know that tech stocks and growth stocks tend to be the most sensitive to market movements and favourable economic conditions. Case in point, check out how the Nasdaq 100 index soared following the COVID-19 crash of March 2020, when interest rates were dropped.
This ETF is heavily weighted towards mega-cap tech stocks, around 50% of its portfolio held in the tech sector. The top 10 holdings in this ETF comprise many of the popular FANGMA stocks, which account for a substantial portion of its portfolio.
To track the Nasdaq 100 easily, investors can buy Horizons NASDAQ 100 Index ETF (TSX: HXQ). This ETF delivers affordable exposure to its benchmark index with a low 0.28% expense ratio. It also pays very low dividends, making it a tax-efficient holding outside a Tax-Free Savings Account or Registered Retirement Savings Plan.
The S&P 500 (leveraged)
Now, if you’re more of an advanced, short-term investor looking to trade around momentum in a bull market, then a leveraged ETF like Horizons BetaPro S&P 500 2x Daily Bull ETF (TSX:HSU) could work. This ETF delivers two times the daily returns of the S&P 500 index net of fees.
Now, the keyword to focus on here is daily. Investors who hold HSU beyond a single day can experience unpredictable results. The two times leverage target is reset daily, so compounding can work against you in a high-volatility, sideways market if you hold it longer than a day.
The other reason why HSU makes for a poor long-term holding is due to its high expense ratio. The ETF uses derivatives to obtain its leverage. These derivatives are costly. Right now, HSU charges an expense ratio of 1.54%, which is many times that of HXQ. Buyer beware!
