Using ETFs To Help You Cherry Pick Stocks

Cathie Woods and her ARK Invest group of funds are changing the way investors look at Exchange Traded Funds in a number of ways. Whether it's from the standpoint of high-performing funds or innovative investment strategies that are looking years or even decades down the road, what Cathie and her team are doing is extraordinary. But what may be the biggest and most important innovation ARK is bringing to the investment community is the transparency her funds have shown investors.

ARK Invest gives investors the stocks they are buying. Well, every fund does that. But what ARK does, is they give you their stock buys and sells on a daily basis. Yes daily.

Furthermore, they tell you the exact amount of shares they bought or sold, the amount of money they spent (which allows you to determine the average cost), and which one of the ARK funds the shares were bought or sold in.

This is a big change from the way most funds operate, in which they post quarterly or monthly their holding list, number of shares, and percent that the company makes up in the fund based on assets under management.

While what Cathie and ARK are doing is ideal, investors can still use the information other funds provide in order to ‘cherry pick’ stocks in certain industry’s that they believe will do better than others. While this idea may not be for all investors, it is something that investors who prefer to buy individual equities, as opposed to going down the ‘fund’ route, can still use ETFs and other funds to their advantage, without ever owning them.

The idea is that if you find a single fund, or ideally a group of funds, are all buying a certain stock and in large amounts, it may be a sign that the stock is worth your time to research. Obviously, when just one fund is buying, or one family of funds, such as the ARK Invest family, say the ARK Innovation ETF (ARKK) and the ARK Next Generation Internet ETF (ARKW), are both buying a stock, it could be because one analyst team thinks the stock is good. Not a bad idea to take a look at a stock at that point.

But, when say ARK Invest, Vanguard, and Invesco are all buying a particular stock over the course of a certain time period, that’s a good sign that not just one analyst team at a big fund family thinks the stock is a winner, but that multiple analyst teams are all coming to the same conclusion, around the same time.

Furthermore, if you look at the top holdings of different funds or different fund families, that will give you some insight into which stocks each analyst team thinks deserves the largest piece of their pie. So, for example, if ARK has stock ABC in its top 5 holdings and Vanguard has that same stock in its top 10 holdings while Invesco has it in their top 3 holdings, that would even further confirm that all these analysts believe the stock is going to do very well in the future.

However, when we are looking at top holdings, we do need to consider the stock's previous performance. For example, if a stock recently had a big move, say 30% over the past 6 months. Then that could just be a sign that the firms all liked the stock, and they were all correct in doing so. On the other hand, the reason the stock was in the top holdings was because the share price recently ran higher, and the firm just hasn’t sized back its position.

Although, when you find a stock that has been recently bought by different firms, and it hasn’t made a big move higher, but it holds a top holding spot than that is a real sign that professional analysts all like the stock to make a big move in the future.

Also, remember that some stocks are required to be owned by certain funds. Such as those that track different indexes. They are forced to own certain stocks and at a certain percentage compared to other companies. A great example of this is Tesla and when it was added to the S&P 500. Funds that tracked the S&P 500 were forced to buy Tesla and make it a top holding because it was going to be a top holding in the S&P 500. So always double-check and see if the stock that is being bought is not one that was recently added to an index.

It should be said that even though professional investors prefer one stock over another doesn’t mean that they will be correct about its future performance. All investors should do their own research and consider the risk-reward of each investment they make. But, closely following and watching what the professionals are buying and selling is a great idea generator for new potential investments in your portfolio.

Matt Thalman Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not own shares of 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 for their opinion.