For 11 years, it was relatively smooth sailing for investors. Following the March 2009 stock market bottom, all three major U.S. indexes ended up at least quadrupling in value, if not delivering even more robust returns. Then the coronavirus disease 2019 (COVID-19) pandemic came along and disrupted the economy, labor force, and stock market like nothing we'd ever seen before.
Uncertainties tied to the coronavirus pushed the broad-based S&P 500 into bear market territory in just 17 trading sessions, marking the fastest decline into a bear market in history. Ultimately, the benchmark index fell 34% in a mere 33 calendar days before rebounding to where it is today.
A bear market is the perfect opportunity for investors to load up on high-quality ETFs
Stock market corrections of all sizes have historically proved to be excellent buying opportunities for long-term investors. Although we'll never know ahead of time when a correction will occur, how steep the decline will be, or how long it'll take to hit the bottom, we do have plenty of data showing that the S&P 500 eventually puts all corrections (and bear markets) into the rearview mirror.
The real decision shouldn't be if you should buy equities, but what you should buy.
I can rightly imagine that some folks wouldn't feel comfortable picking individual stocks, especially given either the volatility we've seen of late or perhaps their own lack of investing knowledge. That's where exchange-traded funds (ETFs) come into play. An ETF is a single security that contains a basket of stocks with a specific focus -- based on market cap, growth/value, industry, or some other broad theme. The point is that investors buying into an ETF can gain instant diversification or focus without having to research a dozen or more companies within an industry.
What's more, you don't have to have Warren Buffett's wallet to buy into ETFs. If, say, you even have $1,000 in disposable income that won't be used for bills or your emergency fund, you've got more than enough to go shopping for ETFs.
If you're looking to put your money to work with equities on sale, here are three of the smartest ETFs you can consider buying and holding for at least the next five years.
Global X Cloud Computing ETF
Though debatable, one of the more unstoppable industries in the years (or decades) to come will be cloud computing. As businesses continue to move beyond their static office spaces and toward an environment where data can be accessed anywhere by employees, the need for software-, platform-, and infrastructure-as-a-service is only going to grow. That's why the Global X Cloud Computing ETF (CLOU 2.42%) should be on your buy list.
As you might imagine, the Global X Cloud Computing ETF is going to give investors an opportunity to be on the cutting edge of cloud technology innovation, all without having to be an expert on the various layers of cloud services. It currently holds 36 different stocks, only two of which have a weighting of more than 5%. This means you're getting a pretty even keel of opportunity, with everything from established infrastructure plays like Amazon to software-as-a-service kingpin Shopify in the mix.
To be clear, this isn't a value ETF. You're buying it to take advantage of the aggressive growth in cloud services that'll likely be accelerated by the COVID-19 pandemic. That means you'll need to put up with a high trailing price-to-earnings ratio, as well as net expense ratio of 0.68%, which isn't exactly low. But the payoff could be immense if cloud computing continues to grow by a hearty double-digit percentage for the foreseeable future.
VanEck Vectors Gold Miners ETF
In the investment world, "this time it'll be different" is often a dangerous phrase. But when it comes to precious-metal mining companies, this time it may very well be different, which is why the VanEck Vectors Gold Miners ETF (GDX 2.25%) is worth buying.
Generally speaking, physical gold and gold miners perform their best toward the tail-end of a recession and early on during a recovery. In other words, we're nearing the sweet spot for precious-metal miners. However, gold-mining stocks tend to underperform the broader market when the economy is firing on all cylinders, leaving them as long-term laggards. But this time could be different.
In my 21 years of investing, I've never seen a more perfect setup for the gold market. Global bond yields remain historically low, providing few avenues for investors to lock in guaranteed gains. Even if conservative investors find a positive-yielding bond, chances are that it won't outpace the inflation rate, thereby leading to real-money losses. Tack on unlimited quantitative easing in the U.S. and ongoing uncertainty tied to COVID-19, and you have a recipe that makes gold the logical store of value for the foreseeable future.
However, since physical gold offers no yield, the smartest way to play this rise in value is by purchasing gold miners, or more specifically, the VanEck Vectors Gold Miners ETF. I suspect we're in a scenario where we could see gold prices comfortably advance for the next five years. That would be great for mining companies that are able to leverage an increase in the physical price of gold.
ALPS Medical Breakthroughs ETF
Another ETF that the smartest investors will be buying and holding is the ALPS Medical Breakthroughs ETF (SBIO 3.34%).
While there are a number of diversified pharmaceutical and biotech ETFs that investors can buy, this one is unique. It holds around six dozen U.S.-based drug developers that typically range in market cap between $200 million and $5 billion and have at least one experimental drug in phase 2 or phase 3 trials. The ALPS Medical Breakthroughs ETF also screens for sustainability -- drug developers aren't added unless they have enough cash to fund their operations for at least two years.
The interesting thing here is that most clinical trials are doomed to fail. That's why placing a bet on any one clinical-stage biotech or pharmaceutical company can be risky. But when you own a basket of nearly six dozen under one security, all it takes is a few big wins for the ETF to deliver substantive returns.
For example, top-15 holding Intercept Pharmaceuticals (ICPT 9.52%) has a date set with a U.S. Food and Drug Administration (FDA) panel on June 9 regarding Ocaliva as a treatment for nonalcoholic steatohepatitis (NASH). In late-stage trials, Intercept's lead drug met one of two co-primary endpoints -- a statistically significant improvement in fibrosis of at least one stage without NASH worsening -- but also led to high instances of pruritus in patients. With no therapies currently approved to treat NASH, Intercept's Ocaliva has an opportunity to achieve first-mover status in a $35 billion indication.
Just a few key wins is all it would take for the ALPS Medical Breakthroughs ETF to shine.