Beating Jeff Bezos and Amazon stock is tough, especially if you diversify. But a small group of ETFs and ETNs are showing it's rare, but possible, to outperform one of the S&P 500's top stocks with high-risk bets.
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Just 11 U.S.-listed exchange traded funds and exchange traded notes (ETNs) are outpacing Amazon (AMZN) this year even as it's one of the top stocks in the S&P 500, surpassing even Apple stock (AAPL). MicroSectors FANG+ 3X Leveraged ETN (FNGU), for instance, returned more than 180% this year. That tops the nearly 79.3% return of Amazon.com this year through Aug. 18. That's the day the S&P 500 hit a new high after the coronavirus crash.
Doubling or tripling down on Amazon, like MicroSectors FANG+ does, is one high-risk that worked.
But outside of information technology, the $1.9 billion-in-assets ARK Genomic Revolution ETF (ARKG) returned 84% this year without leverage. Meanwhile, its affiliated $2 billion-in-assets ARK Next Generation Internet ETF (ARKW) is up 79.5%, even though Amazon isn't even a top 10 holding.
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Surpassing a top stock with an ETF, though, is rare. "The idea that a diversified portfolio will beat any single outperforming stock is a bit silly on the face of it," cautions Dave Nadig, chief investment officer of ETF Flows. "You cannot construct a portfolio of 100 stocks that beats the best performing single stock over a single momentum swing in the market."
Beating Amazon And Apple With ETFs Is Tough
Scanning the market's winners shows why many investors might think owning Apple and Amazon is all you need.
Just five S&P 500 stocks, including Apple and Amazon stock plus Microsoft (MSFT), Alphabet (GOOGL) and Facebook (FB), added nearly a quarter of the $12.8 trillion in paper wealth gained from the bear market low on March 23.
So topping those kinds of gains with ETFs often means magnifying your risk, rather than cutting it. For instance, the MicroSectors FANG+ ETNs, including the MicroSectors FANG+ 2X Leveraged ETN (FNGO), makes massive bets on the NYSE FANG+ Index.
This index includes just 10 tech and internet companies. It equal-weights 10% holdings in Tesla (TSLA), Nvidia (NVDA), Alibaba (BABA), Baidu (BADU), Twitter (TWTR), Facebook and Netflix (NFLX) in addition to Apple, Alphabet and Amazon.
Leverage is then applied to multiply the daily changes in the underlying stocks' value. The ETN also charges a 0.95% annual fee. ETNs use uncollateralized debt structures, versus owning shares outright like ETFs. These leveraged tools are for savvy rapid-fire traders, says Todd Rosenbluth, head of mutual fund and ETF research at CFRA. "Leveraged ETFs ... come with elevated risks," he said.
Looking To Beat Amazon
Only a handful of non-leveraged funds top Amazon stock. That's in large part by playing the online shopping trend. ProShares Long Online/Short Shores ETF (CLIX) bets on the rise of online shopping and demise of physical stores. Amazon.com is the ETF's top holding at 22%, in part explaining the ETF's 87% return this year.
Similarly, the ProShares Online Retail ETF (ONLN) returned 85.7%, edging out Amazon's gain, too. Amazon is also the ETF's top holding at 22.5%.
The onus is on managers to find missed opportunities while megacompanies like Amazon and Apple drive the market. Actively managed ETFs, where managers try to beat the market, are less than 1% of stock ETF assets.
ARK Innovation is the standout, says Rosenbluth. The ETF keys in on high-growth areas in financial, genomics and industrial innovation. Its top holdings of 46 positions are Tesla at 11%, Invitae (NVTA) at 7.3% and Square (SQ) at 6.7%. It charges 0.75% annually and Amazon isn't in the top 10.
Watch Your Risk Beating Amazon Stock
Trying to is no small feat. And sustaining it is even harder.
Neither of the ARK ETFs beating Amazon stock this year have done so over the past three or five years, too. ARK Genomic Revolution and ARK Next Generation Internet returned 25.6% and 29.2% annualized, respectively, over the past five years. Those are stellar gains. But Amazon rose 44% annually the past five years.
Rosenbluth points out Amazon stock and Apple are overweight in broader growth ETFs like Invesco QQQ Trust (QQQ) and Vanguard Growth (VUG). "Those ETFs also provide exposure to other stocks and industries that can benefit if the global economy recovers or if investors rotate toward other growth oriented securities," he says.
And Nadig cautions diversification is still valuable, even if it hurts short-term results. "If you believe that Apple will do nothing but go up, never have a bad headline, or a bad quarter, then hey, put all your money in it," he says. "History would suggest this is an outrageously foolhardy long term investment strategy."
Few ETFs And ETNs Top Amazon Stock This Year
| Name | Ticker | Inception Date | YTD Total Return % | Total % Return 3-Yr (Annualized) | Total % Return 5-Yr (Annualized) | Expense Ratio |
|---|---|---|---|---|---|---|
| MicroSectors FANG+ 3X Leveraged ETN | (FNGU) | 1/22/2018 | 187.0% | N/A | N/A | 0.95% |
| Grayscale Ethereum Trust | (ETHE) | 12/14/2017 | 187.0 | N/A | N/A | 2.5% |
| MicroSectors FANG+ 2X Leveraged ETN | (FNGO) | 8/1/2018 | 132.5 | N/A | N/A | 0.95% |
| VelocityShares 3x Long Silver ETN | (USLVF) | 10/14/2011 | 118.6 | 17.45% | 8.5% | 1.65% |
| iPath S&P 500 Dynamic VIX ETN | (XVZ) | 8/17/2011 | 104.7 | 19.8 | 8.3 | 0.95% |
| ProShares Ultra Silver | (AGQ) | 12/1/2008 | 98.4 | 21.0 | 13.1 | 0.97% |
| VelocityShares 3x Long Gold ETN | (UGLD) | 10/14/2011 | 90.1 | 34.6 | 24.8 | 1.35% |
| ProShares Long Online/Short Stores | (CLIX) | 11/14/2017 | 86.8 | N/A | N/A | 0.65 |
| ProShares Online Retail | (ONLN) | 7/13/2018 | 85.7 | N/A | N/A | 0.58 |
| ARK Genomic Revolution | (ARKG) | 10/30/2014 | 84.0 | 45.7 | 25.6 | 0.75 |
| ARK Next Generation Internet | (ARKW) | 9/30/2014 | 79.5 | 46.2 | 39.2 | 0.75 |
| Amazon.com | AMZN | 5/15/1997 | 79.2 | 51.2 | 44.0 | N/A |
Source: IBD, Morningstar Direct
Follow Matt Krantz on Twitter @mattkrantz
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