Dear Happy Investor, 2022 is a special stock market year that shows the "other side." Even ETFs are not safe from huge price declines. Some fallen ETFs are currently at even -75%! As a novice investor, you may now regret your choice. Maybe you are at -20%, or even lower. This is annoying, even though you are investing with money that you can miss in the long run. On the other hand, it also presents opportunities: invest in sunken ETFs with potential. The more an Exchange-Traded Fund sinks, the more attractive its average financial valuation. The latter gives more future Value, which increases the chance of high returns.
Or in simple language, buy the dip in sunken ETFs with potential and hold for the long term.
There are many examples of sunk ETFs with potential. Below I share three with you for inspiration. This is not a buy recommendation, but education on how to spot opportunities.
1. VanEck Semiconductor ETF (SMH/VVSM)
The VanEck Semiconductor ETF (SMH/VVSM) is an interesting fallen ETF with potential. In previous research, I indicated that this sector was overvalued in terms of financial valuation. Recently, the sunken ETF is down about -25%. This could potentially extend below the 2021 level.
However, the future of semiconductor companies is not in question. The current situation is also affecting them, but even so, there are many companies including ASML that are raising their earnings forecasts. And with the recent decline, this sinking ETF has a more favorable financial valuation:
- P/E: 18.8
- P/B: 5.6
- Average market cap: $197 billion
In my opinion, the VanEck Semiconductor ETF offers future potential. From this point and with further price declines, this seems like a good long-term investment. Although the fallen tracker is not without risk. The number of positions is only 25, of which 76% are in the top 10. And the geographic spread is not super, with 76% U.S. stocks.
On the other hand, the tracker tracks strong companies, including ASML, Nvidia and Intel.
Within the semiconductor ETF, we see some very interesting individual stocks. ASML is a top company, but there are better semiconductor stocks out there right now. They can offer seriously high returns given their Value. Learn more about our research in our stock subscription.
2. WisdomTree Cloud Computing ETF (WCLD)
WisdomTree Cloud Computing ETF (WCLD) is an interesting sunken ETF with potential for future growth companies in the cloud industry. The tracker is down 45% since the beginning of 2022. The price is now even lower than pre-corona. Is this entirely justified, or is there fear here?
The financial valuation of cloud companies was sky-high in 2021. Companies like Asana (ASAN) and Cloudflare (NET) fell 83% (!) and 73%, respectively, from their peak. And it is likely that the price decline will continue for some time.
WCLD is, in my view, a sinking ETF with potential. The tracker tracks about 75 cloud companies and allocates them proportionately. The top 10 have less than 20% weighting. This provides a lot of risk diversification within the sector. The logic behind the strategy is to profit from the few cloud companies that are growing exponentially. This return more than makes up for the loss of the "losers".
WisdomTree Cloud Computing ETF has fallen a lot and has potential. Yet the tracker has high risks. A further price decline is plausible. For example, only a handful of the tracked cloud companies are making a profit. The average P/B is 5.47 and the average P/S 5.74. The Price/Cash Flow is very high at 97.41. These are all growth stocks, which are not suitable for risk-averse investors.
As far as I am concerned, WCLD is still among the best long-term eToro ETFs. That I could be wrong is possible, although the investment thesis for cloud computing seems pretty relevant. The stronger the price drop, the more favorable the entry point for the long term.
3. iShares Global Clean Energy ETF (INRG)
The iShares Global Clean Energy ETF is also among the sunk ETFs with potential. In a previous analysis of this ETF, I indicated that the tracker needs a fix correction. Since that article, the ETF has fallen 30%. And even at this price level, the Exchange-Traded Fund for clean energy may fall further. On the other hand, it is a relevant theme with potential.
The iShares Global Clean Energy ETF tracks about 100 companies that contribute to clean energy. Currently, the P/E is still on the high side at 28, despite the fixe decline. The P/B of 2.3 is acceptable. On the other hand, the long-term potential is interesting. Right now, prices of oil and natural gas are shooting up. However, everyone knows that this is not the future. Clean energy is the future. And the more expensive oil and gas, the more attractive it is for companies and individuals to invest in clean energy.
This sunk ETF offers long-term potential. Given the somewhat high financial valuation, this is not the best time to go all-in. However, it may be interesting to start investing monthly. Market timing is tricky, but the valuation is too high for a lump-slump approach.
It is also important to understand that there are big differences within this tracker. There are risky sustainable stocks like Plug Power and Ballard Power, which work on hydrogen. And there are pure Value stocks like Daqo New Energy. Very likely the latter will perform significantly better in the short term. This is the advantage of investing in the best stocks.