By Greg Jensen
CEO and Founder, OptionsANIMAL
The short answer: Both.
We are often asked by our students whether we prefer to build a portfolio of ETFs, equities, or both. There is a place for both in a solid portfolio.
Certainly ETFs are an attractive investment because they can be bought and sold easily (looking for high liquidity? How about at least 1 million sh/day). They do not have the sharp moves that an individual equity can have (E.g. around an earnings event), and still have options with them.
Some really great ETFs to consider are: XLF, EWZ, IWM, EEM, and SPY (Yes – that’s an ETF).
However, you’re not likely going to see rapid movement in ETFs like you will see with a stock. Take Apple (AAPL) for instance. It has had a long move up since January. It opened up the year hovering around $420 and has had a solid bullish move all the way past $600. A lot of analysts don't think it's done yet. In fact, several of them are predicting a move to $1,000 in the next few years. Not all stocks have bullish moves like AAPL, but the possibility is there. These predictions are of course severely rattled by the news of Federal legal action.
Investing in ETFs to cover broad market sectors is a good idea. ETFs make great investments when using covered calls and collar trades. Covered calls and collar trades aren’t going to get you an enormous return on your investment. On the contrary, they aren’t very volatile either, so they are less risky.
Great places to shop for opportunities in sector diversification include the technology sector has and the materials sector. Both demonstrate nice movement and plenty of stocks.The only rule for diversification is to have no more than 20% of the your portfolio’s value tied to any one equity. For pure options trades, that number is a maximum of 2% risk of the entire portfolio.