Ever think you could build a portfolio that can outperform the market? Many analysts point to the fact that the majority of hedge funds underperform the S&P 500 SPDR ETF (NYSE:SPY), stating that you’re better off just holding the SPY than you are attempting to build a portfolio that beats the market. However, the fact they neglect to tell you is that certain investment vehicles and industries do outperform the SPY.
Today, we look at five investments that have been outperforming the SPY year-to-date and should continue to do so throughout 2016. Let’s begin:
Hedge Fund “Very Important Positions” (VIPs)
Those stocks that hedge funds own the plurality of tend to outperform the market. If hedge funds own close to 50% of the company, it implies some important things about the stock. First, the stock has a high chance of being a company that most investors do not understand; only those with strong research teams and tools (i.e., hedge funds) could know why holding this stock will pay off in the long-run.
Second, if most of the stock is in the hands of hedge funds it implies that the stock is being bought up ravenously for a specific reason. Hedge funds usually do not act so aggressively, so when we see fierce buying activities we can safely assume that the stock in question is almost a sure thing.
The major 2016 VIPs follow:
- InterXion (NYSE:INXN), a little-known cloud data center. The cloud service industry is growing at a rapid speed, and while stocks such as Amazon (NASDAQ:AMZN) and Microsoft (NYSE:MSFT) offer popular cloud services, neither of these companies are 100% focused on the cloud. INXN, however, gives you much more exposure to growth in cloud services.
- Fleetcore Technologies (NYSE:FLT), a commercial fuel card processor that has weathered the oil bear market. The fact that FLT has managed to perform well during this market shows that there is little downside. But when oil begins to rebound, FLT should see huge upside.
- Charter Communications (NASDAQ:CHTR), which is soon to merge with Time Warner Cable (TWC) to become New Charter. This new company will become the second-largest broadband provider in the US. Investors holding either of these stocks will get in on this new company at the ground level.
Stocks with Overseas Exposure
Despite a strong dollar, stocks that see much of their earnings come from overseas revenue have been outperforming. The US’s growth is slower than that of countries abroad, even in 2016, allowing for the forex issue to be mostly bypassed. However, many investors are avoiding overseas exposure because of the fear of a strong dollar equating to less revenue for these companies. They are wrong.
Adding companies with foreign exposure to your portfolio is often advised for the sake of diversification (thereby reducing market risk), but in 2016, it’s more than just diversification: These companies will actually help your portfolio outperform their US-only counterparts.
Example stocks include Aflac (NYSE:AFL), which sees the majority of its revenue come from Japan; McDonald’s (NYSE:MCD), which you can find in every square mile of every foreign city (except for Japan, oddly enough); and EMC (NYSE:EMC), which is seeing double-digit growth in Japan and Asia.
Never heard of BRI stocks? Well, have you heard of BRIC stocks? BRI is BRIC ex China.
Brazil, Russia, and India have performed well this year and should continue to do so as these countries continue their growth as emerging markets. As many investors fear that the Russian economy will tank as a result of low oil prices, many companies with no business in oil have been unfairly punished, allowing us to buy at discounted prices. Year-to-date, your investment in these countries would have beaten the US general market. While China is not doing well, the “true” emerging economies are outperforming. If you want exposure, a BRIC ETF might not be the best idea, as they tend to overweight Chinese stocks.
Instead, consider the iShares India Index ETF (INDA), the iShares MSCI Brazil Capped ETF (EWZ), or the iShares MSCI Russia Capped ETF (ERUS).
Investments Sensitive to Interest Rates
While interest rates have not yet risen in 2016, investments that are sensitive to interest rate increases have outperformed. What will happen to such stocks in light of the possible June interest rate hike is still questionable, but you can logically predict the consequences. For example, banks will be able to pass on that higher interest rate to its customers, increasing their margins.
So far, we have a large variety of interest-rate-sensitive investments that continue to outperform: The SPDR Gold Trust ETF (NYSE:GLD) has had one of its best quarters, influencing even non-gold-bugs to take a second look at this ETF. It should stay strong if rates are not raised. Gold has been trending sideways as investors become fearful of the possibility of a June interest rate hike. However, the market is telling us that a hike is unlikely to occur: Accorfing to CME Group, the probability of an interest rate raise in June is only 26%.
This makes us bullish on gold. But you never want to buy GLD outright, as your gains from this ETF are taxed as collectables – at 28%. However, we can circumvent this tax by playing GLD with stock options. Options are taxed as income or capital gains, depending on the holding period. With both tax rates being lower that the collectables tax, options make the ideal strategy.
Here is my recommended option strategy on GLD:
This is a ratio call spread. The sold call option allows us to open the strategy at a credit. We gain $367 upon opening it.
In addition, we have limited risk and unlimited upside. Should GLD’s price or volatility spike, this option will pay off handsomely. If GLD exceeds 122, the strategy begins to mimic holding 100 shares of GLD – without the tax burden!
While investing in the stocks above will give you a great chance of beating the market, they do not replace owning a high-quality income stock that you can trust to give you a pay raise every year.
In the market right now there are a limited amount of options for investors looking to earn a growing income stream from safe investments. And, with the Federal Reserve punishing savers like they are right now, buying a safe CD that pays good interest is no longer an option.
So, what are investors to do with their portfolio’s?
Recently, Tim Plaehn, income expert with Investors Alley, met with the CEO of one of America’s fastest growing specialty banks, and what he told me just blew me away.
This bank didn’t take TARP money or other taxpayer bailouts–or any other bailouts for that matter–back in 2008 or ever.
This bank didn’t get tangled up in risky mortgage-backed securities, credit default swaps, stress tests, FDIC watch lists… you name it.
The CEO told Tim how his bank has been growing by leaps and bounds since even before the financial crash of 2008 and while impressive it’s not what stopped Tim in my tracks.
This specialty bank in America’s heartland is currently paying 7%.
He then shared with Tim exactly how his bank is able to pay so well and how everyday Americans (and Canadians!) can get in on this. Click here to find out.
Tim jotted down all of his notes and put them in this one report for you.