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Burned by the Market? Try These 3 Passive Investments Instead

By James Brumley – Nov 20, 2021 at 8:10AM

Key Points

  • Indexing doesn't have to be limited to investment instruments built around the S&P 500.
  • Dividend stocks tend to be better shielded from sweeping setbacks than non-dividend names are.
  • Wild swings can prompt investors to make errant, poorly timed exit decisions.

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Investors don't have to sacrifice good returns to steer clear of the market's uncomfortable volatility.

Whether you've been an investor for 30 days or 30 years, you know at least one thing to be true: Trying to beat the market by constantly swapping out stocks in search of the next big thing is hard to do. Suggestions that more than 80% of true short-term traders ultimately lose money seem outrageous -- until you actually try to do it. Then the metric makes sense.

The stock market is simply too unpredictable to outguess in the short run. The people making most of the money in this game are the ones who let most of their holdings simmer for the long haul. Indexing remains the best-suited strategy for most investors.

With that at the backdrop, here's a look at three completely passive investment vehicles that sidestep the trappings of short-term trading. All three are even exchange-traded funds, which lend themselves to a long-term mindset.

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Image source: Getty Images.

1. iShares Core S&P Mid-Cap ETF

Anyone that's heard the indexing sermon before likely knows the SPDR S&P 500 ETF Trust (SPY 1.39%) is the most popular means of employing that strategy -- and rightfully so. The fund not only represents the market's most familiar benchmark but also reflects about 80% of the United States' investable market.

But an S&P 500-based ETF isn't necessarily the best means of plugging into the overall market's natural ongoing growth. Mid-cap stocks, as measured by the S&P 500 Mid Cap Index, actually outperform large-cap stocks, given enough time. Since the year 2000, the iShares Core S&P Mid-Cap ETF (IJH 1.27%) has nearly doubled the gain logged by its large-cap counterpart.

SPY Chart

SPY data by YCharts.

When given just a little thought, this disparity makes sense. While large caps are typically well-established companies, this foundation typically means their highest-growth years are behind them. Mid caps, on the other hand, are often in their proverbial sweet spot in terms of growth: before full maturity, but after the wobbly start-up years that many companies don't survive.

2. PowerShares DB Commodity Index Tracking Fund

While most investors start and stick with stocks of conventional companies in their portfolio, equity isn't your only option. You can -- and should --- own some physical assets, like gold, grains, or crude oil, as well. These commodities rise and fall just like companies' stocks do but not in tandem with the broader market.

Problem(s): Owning actual commodities can be tricky to do, and even where it's feasible, investors can find themselves forced into choosing some commodities instead of others at the exact worst time to do so.

The PowerShares DB Commodity Index Tracking Fund (DBC -0.33%) solves both problems. This exchange-traded fund is built to mirror the Deutsche Bank IQ Optimum Yield Diversified Commodity Index, which simply buys and holds stakes in the world's 14 most important, commonly held commodities like the aforementioned gold, oil, and grains.

This still doesn't prevent temporary setbacks. Indeed, this ETF can at times tumble as much or more than stock-based indexes. It just usually does so at different times. But this basket of commodities also doesn't tempt investors to try and cherry-pick what look like budding trends from individual commodities, which is just difficult to do very well for very long. It's meant to be a buy-and-hold sort of position.

3. ProShares S&P 500 Dividend Aristocrats ETF

Finally, add the ProShares S&P 500 Dividend Aristocrats ETF (NOBL 0.80%) to your list of passive investments to consider if you've decided a more active stock-picking approach isn't working well enough for you.

Just as the name suggests, the ProShares S&P 500 Dividend Aristocrats fund holds stakes in the S&P 500 Index's 65 stocks that have raised their annual dividend payments every year for at least the past 25 years. The yields corresponding to these dividends aren't necessarily all that impressive, but they're clearly reliable and progressive. That's something, particularly if you're willing to sit on these names for the long haul.

Mutual fund company Hartford calculates that a little over 40% of the market's total gains made since the 1930s comes from dividends. This income can curb the gut-punch feeling you get when one of your non-dividend-paying stocks implodes, making them much easier to stick with (as you should) even in turbulent times.

Their income aspect isn't even the entire upside of holding proven dividend payers though. Just as important is the fact that the same consistency that supports this continued dividend growth also means Dividend Aristocrats are typically buffered from economic turbulence. This in turn means the market is a little less likely to beat down these stocks when things broadly take a turn for the worst.

And the numbers bear this idea out. Data from Morningstar indicates that while the Dividend Aristocrats only match 91% of the overall market's gains, these stocks also only suffer 79% of the broad market's pullbacks. That's a trade-off most any investor can live with.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ProShares S&P 500 Aristocrats ETF. The Motley Fool has a disclosure policy.

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