Micro and Macro Investing Using ETFs

Most people wouldn’t think that investors could use Exchange Traded Funds to invest from both a macro standpoint and from a micro point of view, but due to the increasing number of ETFs now available to investors, this is possible.

First off, what is micro or macro investing?

Macro investing is when you take high-level data points and base your investment strategy on that information. A few examples of high-level data points would be gross domestic product, unemployment stats, US Home Sales stats, current interest rates, consumer confidence, business confidence, the purchasing manager's index, and so on. These data points highlight certain aspects of the economy from the ten-thousand-foot level. The macro picture will tell you how an economy is doing from a very general aspect.

The opposite side of that is micro investing or taking information from much smaller sample sizes and making investment decisions based on that information. A microdata point could be something as small as Apple’s (AAPL) revenue from their most recent earnings report or Amazon.com’s (AMZN) number of Prime Members subscribers. This very small, very direct and specific information will not tell you how the overall US economy is doing, but it would give you a better idea about how Apple or Amazon are faring as opposed to just knowing that the US GDP grew by 3.0% last quarter.

So how would you take macro investment data and put it to use with ETFs? Well, you would first want to determine if the data is indicating that the economy is growing or contracting. Then, let’s say it is growing, you would want to stick to the indexed ETFs like the SPDR S&P 500 ETF Trust (SPY) if you want to buy an indexed ETF of the S&P 500, the SPDR Dow Jones Industrial Average ETF (DIA) if you want to buy an indexed ETF of the Dow Jones Industrial Average, the Invesco QQQ Trust (QQQ) if you want to buy an indexed ETF of the Nasdaq, or iShares Russell 2000 ETF (IWM) if you want to buy an indexed ETF of the Russell 2000.

These all give you exposure to a wide slue of the market, and thus if it moves higher as a whole, you would do very well. If you didn’t think the market was going to move higher because the macro data was indicating the economy was slowing or weakening, you could buy inverse ETFs of these indexes. Things like the ProShares UltraShort S&P 500 (SDS) which is two times inverse the movement of the S&P 500, or the ProShares UltraPro Short QQQ (SQQQ) which is three times inverse the Nasdaq.

Micro investing with ETFs does get a little more complicated, but that is because, with ETFs, we aren’t just buying one stock, we are buying a group of stocks, however, because ETFs have become so focused, we can still invest from a micro standpoint to an extent. For example, if we wanted to buy an ETF with high exposure to Amazon because we think the price of Amazon is going to move higher, we would find an ETF that had Amazon as its largest holding. As of the most recent data, the Fidelity MSCI Consumer Discretionary Index ETF (FDIS) has the most exposure of any ETF to Amazon; it represents 23.19% of the ETF. You can do this with any stock.

But what if you wanted to mix a little macro investing style with a little micro investing style?

Well, then you would be talking ETF managers language correctly. ETFs are good at macro investing but less so at micro-investing, despite being able to accommodate investors who want to use them for that purpose. But, a mix of both styles is perfect for the new string of ETF’s that have hit the market in the past few years.

A perfect example of this is the so-called FANG ETFs like the BMO Rex MicroSectors FANG+ Index 3x Leveraged ETN (FNGU) and the BMO REX MicroSectors FANG+ Index -3x Inverse Leverage ETN (FNGD) which focus on the FANG stocks and a handful of other technology-focused stocks. Or the Cyber Security ETF, the ETFMG Prime Cyber Security ETF (HACK) which focuses solely on, who guessed it, cybersecurity companies.

If you think the economy is still not yet heading directly towards a recession because the macro data doesn’t indicate something negative is coming, but you think the FANG stocks or oil and gas stocks are about to collapse, you can use an ETF that focuses on that industry to turn a profit.

Whether its high-level data or information about a single stock, you can use ETFs to invest however you want, while protecting yourself and lower your risk of from misreading the data because you will always be buying a bundle of stocks when you buy that one ETF.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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