3 Simple Ways To Beat The Market With Stocks And ETFs (2024)

3 Simple Ways To Beat The Market With Stocks And ETFs (1)

The goal of every active investor is to create more wealth by "beating the market". That means generating higher returns than a passive benchmark such as the S&P 500 Index, which can be easily invested in with an ETF such as SPDR S&P 500 (SPY). In other words, all active investors are "seeking alpha".

How can active investors accomplish this goal?

There are three simple (but not always easy) approaches investors can use to beat the market with individual stocks and ETFs:

Buy individual stocks and ETFs that beat the market.
Buy levered long ETFs in bull markets.
Buy inverse (short) ETFs in bear markets (or at least exit stocks).

These are not mutually exclusive options, of course. Wise investors seeking to maximize their profits should consider all three approaches when appropriate.

Let's explore each approach and look at some examples.

1. Buy individual stocks and ETFs that beat the market

This is the most popular - but perhaps most difficult - way most active investors try to beat the market. There are many different strategies for doing this. Some investors buy value stocks, some buy growth stocks, some invest in other asset classes like cryptocurrencies, some use fundamental analysis, some use technical analysis, etc.

A key challenge with this approach is virtually every stock and ETF has periods of outperformance and underperformance relative to a benchmark like the S&P 500. This is true for even the most successful stocks and ETFs. Let's look at some examples to make this point more clear.

Netflix (NFLX) has been one of the best performing stocks over the past 20 years, having risen over 50,000% since its IPO in 2002! But even NFLX did not go up in a straight line. For example, it fell about 75% in 2004 and more than 80% in 2011-2012. There are not many investors who have the conviction in a stock to hold on through huge declines like that.

The chart below of NFLX over the past five years shows periods of rising and falling price trends (main top chart), as well as periods of outperformance and underperformance versus the S&P 500 (bottom clip). To try to maximize profits and outperform "buy and hold" investors, wise and experienced investors can use key technical and fundamental indicators to try to capture the periods of price uptrends and outperformance and avoid the weak periods.

Source: Chart courtesy of StockCharts.com, with annotations by BullAndBearProfits.com.

One of the most successful investments in recent years that is not an individual stock is Bitcoin (BTC-USD). The primary "ETF-like" (but not technically an ETF) option for investing in Bitcoin in the US in recent years has been Grayscale Bitcoin Trust (OTC:GBTC).

As the chart below shows, GBTC has had some dramatic moves up and down over the past five years, including rising over 1000% from the Covid-panic bottom in 2020 to its all-time high in February of this year. Interestingly, the price is currently just below the high it reached in late 2017, before it fell 90% in one year!

2. Buy levered long ETFs in bull markets

A far less popular - but potentially easier and more profitable - way to outperform the market is to buy "levered long" ETFs in bull markets (although technically this could be considered to be an application of the first method).

For example, the ProShares Ultra S&P 500 ETF (SSO) seeks to provide twice the daily return of the S&P 500. So if the S&P rises 1%, SSO should rise about 2%. That can be a much easier way to double the return of the S&P 500 than investing in traditional individual stocks and ETFs.

As the chart below shows, SSO (black line in the main top chart) closely tracks the S&P 500 (orange line) over time, not just daily, as many critics of this approach argue. Over the past five years, SSO rose about 270%, while the S&P 500 rose about 106%. Obviously, this approach works best in a bull market uptrend. That makes it critical to understand how to identify bull and bear market trends.

Source: Chart courtesy of StockCharts.com, with annotations by BullAndBearProfits.com.

3. Buy inverse (short) ETFs in bear markets (or at least exit stocks)

In a bear market, one could at least exit stocks to avoid losses, but the much more profitable approach is to buy an inverse ETF, which mimics a short position by moving in the opposite direction of the market. For example, the ProShares Short S&P 500 (SH) ETF rises about 1% if the S&P 500 falls 1%.

For even greater returns (and risk), one could buy a levered inverse ETF, such as ProShares UltraShort S&P 500 (SDS), which provides 2x leverage. So if the S&P 500 falls 1%, SDS should rise about 2%.

If you can earn good profits during bear markets while most investors (including Wall Street professionals) are losing money, you will have a huge advantage in beating the market over time.

For example, during the Great Recession bear market of 2008-2009, the S&P 500 fell about 60%. Meanwhile, SH rose about 90% and SDS rose about 180% during that time. If you bought SH instead of holding onto SPY then, you would have ended up with about 4.75 times more money at the end of that bear market. If you had bought SDS instead of holding onto SPY then, you would have ended up with about 7 times more money!

SH (black line in the main top chart) closely tracks the inverse of the S&P 500 (orange line) over time. Of course, this approach only makes sense in a bear market.

Source: Chart courtesy of StockCharts.com, with annotations by BullAndBearProfits.com.

Summary

The key to beating the market over time is 1) identifying bull and bear market trends and 2) investing in stocks and ETFs that perform best during those trends. We hope this article was helping in providing a good overview of the second key point. Our next Seeking Alpha article will focus on the first key point: how to identify bull and bear market trends.

This article was written by

Jon Wolfenbarger

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I have over 30 years of investment industry experience, including over 22 years as a stock analyst at Allianz Global Investors. I write about generating high returns in any market environment using technical and fundamental analysis. I am Founder & CEO ofBullAndBearProfits.com, a FREE investment website dedicated to helping investors generate market-beating profits with stocks & ETFs in both bull & bear markets.BullAndBearProfits.comFREE features:First-Timer pageWebsite Tour video4-10 new Stock and ETF recommendations per monthVideo webinars, including:HOW TO USE STOCK MARKET INDICATORS TO INVEST FOR BULL AND BEAR PROFITSHOW TO USE ECONOMIC INDICATORS TO INVEST FOR BULL AND BEAR PROFITSSpecial Reports, including:WHY YOU SHOULD INVEST FOR BULL AND BEAR PROFITSHOW TO INVEST FOR BULL AND BEAR PROFITSHOW TO USE TECHNICAL ANALYSIS TO INVEST FOR BULL AND BEAR PROFITSUNDERSTANDING ECONOMICS TO INVEST FOR BULL AND BEAR PROFITSETF & Stock Basics courseInvesting Insights articlesInteractive Member Q&ARecommended ReadingTestimonialsFREE PASSWORDYouTube channel

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

As an experienced investor with over 30 years of industry expertise, I've dedicated my career to analyzing and navigating the complexities of the financial markets. My extensive background includes over 22 years as a stock analyst at Allianz Global Investors, where I honed my skills in technical and fundamental analysis. I am the Founder & CEO of BullAndBearProfits.com, a reputable investment website committed to assisting investors in generating market-beating profits with stocks and ETFs in both bull and bear markets.

Now, let's delve into the concepts discussed in the provided article:

Goal of Active Investors:
- The primary objective of active investors is to outperform the market, commonly measured against benchmarks like the S&P 500.
"Seeking Alpha":
- Active investors aim to achieve "alpha," which refers to the excess return earned beyond the market benchmark.
Approaches to Beat the Market:
- Buy Individual Stocks and ETFs: Active investors often seek to identify and invest in individual stocks and ETFs that outperform the market. Various strategies, including value investing, growth investing, and different analyses, are employed.
- Levered Long ETFs in Bull Markets: Investors can use leveraged long ETFs, like ProShares Ultra S&P 500 (SSO), to amplify returns during bullish market conditions.
- Inverse (Short) ETFs in Bear Markets: In bear markets, investors can exit stocks or use inverse ETFs, such as ProShares Short S&P 500 (SH) or leveraged inverse ETFs like ProShares UltraShort S&P 500 (SDS), to profit from declining markets.
Maximizing Profits:
- Wise investors may consider a combination of the three approaches based on market conditions to maximize profits.
Challenges in Beating the Market:
- The article acknowledges the difficulty in consistently beating the market, emphasizing that even successful stocks and ETFs experience periods of underperformance.
Importance of Timing and Indicators:
- Successful active investing involves using technical and fundamental indicators to identify trends, capturing periods of outperformance, and avoiding weak periods.
Examples:
- The article provides examples such as Netflix (NFLX) and Grayscale Bitcoin Trust (GBTC) to illustrate the volatility and potential returns in individual stocks and non-traditional investments like cryptocurrencies.
Market Timing in Bear Markets:
- During bear markets, the article advocates for using inverse ETFs to profit from declining markets and potentially outperforming the market.
Summary and Future Focus:
- The key to beating the market involves identifying bull and bear market trends and strategically investing in stocks and ETFs that perform well during those trends.
Author Information:
- The article is authored by Jon Wolfenbarger, who boasts substantial investment industry experience and provides insights into generating high returns using technical and fundamental analysis.

In conclusion, the article highlights the multifaceted strategies employed by active investors to beat the market, emphasizing the importance of timing, indicators, and a diversified approach to maximize profits in various market conditions.