Blindly investing with the crowd is never a good idea. But the crowd isn't always wrong -- and if you don't even know what the latest hot investing trends are, you certainly can't figure out whether following the herd is smart or disastrous.
One of the easiest ways to track investor sentiment these days is by looking at exchange-traded funds. With the popularity and ubiquity of ETFs, it's easy to get a useful gauge on where people are putting their money -- and which parts of the market they're trying to escape.
The latest hot sectors
November was a topsy-turvy month for the stock market. Until the last week of the month, it looked like the broader market was in for a big decline. But in those last few days, the major indexes pulled almost back to breakeven.
Even with the rebound, November's volatility appears to have spooked investors. According to a Birinyi Associates report cited in Barron's, investors pulled about 1% of their money out of ETFs, leaving total ETF assets at $1.07 trillion.
But with more than 1,350 ETFs to choose from, investors definitely favored some ETFs over others. Let's take a closer look at the four areas that attracted the most assets during November.
During a lost decade for stocks, gold has performed extremely well for a very long time. In a nutshell, that simple reason is likely responsible for the fact that gold ETFs like SPDR Gold (NYS: GLD) and iShares S&P Gold (NYS: IAU) had by far the largest inflows during November, with gold ETFs generally seeing triple the amount of money come in that the second-most-popular category attracted.
With huge uncertainties in Europe, soaring debt levels in the U.S. and elsewhere, and plenty of stresses on the overall global economy, gold's strength has huge underpinnings. Yet those who put too much of their money into commodities run the risk of a recovery that reawakens interest in stocks -- and creates big outflows to reverse all the inflows commodities have seen in recent years.
2. Corporate bonds
Meanwhile, in the bond market, investors have been stretching for yield using corporate bond funds. Certainly, these ETFs have had no shortage of paper to buy; with companies from Teva Pharmaceutical (NAS: TEVA) to Windstream (NAS: WIN) and dozens of others taking advantage of low rates to refinance existing debt or finance new corporate spending, the surprising thing is that there's been enough demand to absorb all the new bonds.
The same macroeconomic indicators that have supported commodities are also helping boost bond prices. Yet with corporate bonds, investors take on additional default risk -- risk they may not fully understand in their thirst for bigger income payouts. If the economy fails to keep rebounding, then those defaults may come to fruition -- and investors will get a big shock.
3. Mid-cap U.S. stocks
In the stock world, mid caps don't always get a lot of attention. Some see their in-between status as being awkward. But the nice thing about mid caps is that they're small enough to provide explosive growth while being big enough to avoid small-cap blowups. Some good examples of this from 2011 include Hansen Natural (NAS: HANS) and Perrigo (NAS: PRGO) , both of which are up strongly on respective strength in the beverage and pharmaceutical industries.
Those best-of-both-worlds attributes likely explain the appeal of mid-cap ETFs. Mid-cap stocks can be a good addition to a diversified portfolio, but betting everything on mid caps makes no more sense than any other nondiversified market call -- at least to long-term investors.
4. Small-cap U.S. growth stocks
Lastly, small stocks are back on investors' radar screens. With merger and acquisition activity up recently, investors are likely hoping for the big paydays that those stocks sometimes provide.
As with mid caps, small-cap stocks deserve an allocation in your portfolio. Whether you go with ETFs or some of the promising individual stocks that they hold, such as biotech Regeneron Pharmaceuticals (NAS: REGN) and its recently approved Eylea treatment for macular degeneration, having some small caps will put yourself in the best position to benefit no matter which part of the market does best.
Proceed with caution
Of course, trying to use a strategy with only these four investments would involve a pretty high-risk stance -- one that most people wouldn't be comfortable taking. With ETFs, the better strategy is to use their low-cost, high-efficiency traits to build a broader portfolio for all seasons -- no matter which way the winds of inflows and outflows may blow in any given month.
We've got three such ETFs right here, in The Motley Fool's latest free special report on ETFs. Taking a look could be the most profitable move you make all year.
At the time thisarticle was published
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