If you’re going to learn how to trade stocks, there are a number intricacies to understand. Exchange-traded funds (ETFs) could serve as a great way to gain exposure to a basket of stocks. For example, let’s say you think that small cap stocks will outperform the overall market. Well, it’s going to cost you a lot to buy a basket of small cap stocks, rather than an entire index fund. That said, it would be easier and you wouldn’t have to manage so many positions when you just buy a small cap ETF, when compared to buying a basket of, say, 30 stocks. Moreover, you could use options on these ETFs and the money pattern to potentially multiply your money. That said, let’s take a look at the stop 3 small cap ETFs to trade or invest.
Top 3 Small Cap ETFs
I’m all about using index funds to make market calls. If I think small cap stocks will outperform, I’ll look at a number of small cap ETFs. Now, I’m using an indicator that I’ve found to work with a high-probability of success, and I call it the “money pattern”. The reason being: this pattern could multiple your money. However, the catch here is that I’m using options in conjunction with the “money pattern”. So if this pattern indicates bearish trading, I’ll buy put options. On the other hand, if the pattern generates a bullish signal, I’ll buy call options.
You see, options provide leverage. If a small cap ETF has a small move and you’re on the right side of the trade, those options could explode in value and you could potentially double your money in a short amount of time.
Small cap stocks tend to be more volatile, and it could be great if you buy options on small cap ETFs. That said, these small cap ETFs could have large moves in either direction and you could potentially profit from them.
iShares Russell 2000 ETF (IWM)
When I want to gain exposure to the small cap market, I like to either buy puts or calls on the iShares Russell 2000 ETF (IWM). Now, if you’re looking to gain exposure to the small cap market, IWM provides access to 2,000 small-cap domestic stocks included in the Russell 2000 Index. That’s a heck of a lot easier than going out and buy shares of 2,000 small cap stocks. That would be such a hassle and you’d have to spend a lot of money.
There are options on the ETF, which allows you to potentially multiply your money. Here’s a look at an options trade on IWM.
The idea was simple here. I saw my battle-tested indicator flash, and it was indicating there was a bearish pattern in the cards. Well, with no hesitation, I bought put options on IWM. I was initially down a bit on the trade, but it ended up working out.
Check out the chart above and the encircled area. The 13-period simple moving average (SMA) crossed below the 30-period SMA on the hourly chart. Moreover, IWM had some resistance around the $159 – $160 area.
As you can see in the chart above, IWM actually fell a lot lower after I sold my put options. I doubled my money in just a few days, which was my profit target, so I just took my profits. Sometimes, in the heat of the moment, you have to take profits because you don’t know if the ETF will just rally.
iShares Core S&P Small-Cap ETF (IJR)
Another small cap ETF to keep on your watchlist is the iShares Core S&P Small-Cap ETF (IJR). This also provides exposure to U.S. small cap stocks. The ETF aims to track the S&P SmallCap 600 Index. This ETF has net assets of over $40B and it’s liquid, with over 2M shares traded per day on average. It’s one of largest ETFs in the small cap market. The ETF’s top sector exposures include: industrials, financials, information technology, consumer discretionary and health care.
Now, you could also use the money pattern to signal when to buy put or call options on IJR. Here’s a look at where you could have bought either puts or calls on IJR.
When the 13-hourly SMA (blue line) crosses below the 30-hourly SMA (red line), it indicates that the small cap ETF could fall. That in mind, you might’ve considered buying put options when you saw this indicator flash a sell or short signal. Conversely, when you notice the 13-hourly SMA cross above the 30-hourly SMA, you could’ve bought call options. As you can clearly see, you would’ve profited if you did just that.
iShares Russell 2000 Growth ETF (IWO)
The iShares Russell 2000 Growth ETF (IWO) is a specialized small cap ETF. IWO provides exposure to U.S. small cap stocks whose earnings are expected to grow at above-average rates in relation to the market. This ETF tracks the Russell 2000 Growth Index and has net assets of over $10B. Now, this ETF is not as liquid as IWM or IJR, so liquidity could be an issue. IWO trades just over 350K shares per day on average, but this could change over time.
That said, if you’re looking to trade options on IWO, you need to be wary of liquidity issues and wide bid-ask spreads.
Again, you could use the money pattern to trade this small cap ETF.
The Bottom Line
If you’re looking to speculate on small cap stocks, these top 3 small cap ETFs may be suitable for you. Keep in mind, small cap stocks tend to be more volatile than blue chip stocks. So if you’re just getting started out trading, you’ll need to trade small and not let one trade ruin your account if you’re wrong. Using options and the money pattern could be extremely lucrative if you’re right. It’s not crazy to buy options on these small cap ETFs and see the option’s value explode in just a few days.
Jeff Bishop is lead trader at WeeklyMoneyMultiplier.com and widely recognized as the Mensa Trader. He runs short-term trading strategies, using stocks, options and leveraged ETFs.