ETF Investing: Advisors Increase Their Use Of ETFs

Tom Lydon from ETF Trends had a blurb about the increased usage of ETFs by RIAs (Registered Investment Advisors).

He says that the fastest growing advisor segment are those advisors with affiliations for providing fee-based advice. The trend towards independent fee advice continues to grow exponentially and RIAs are catching on to the ETF advantage.

I have written about the fee-based benefits as opposed to dealing with a sales person peddling preferred company products before, so this is no surprise. In my own practice, I have too increasingly used ETF products, but only when appropriate.

There are some advisors who have totally dropped no load mutual funds from their menu of investment choices, but I think that is a mistake. There are times when no load funds are better performers, and there are investment areas where you are better of using ETFs. Of course, you can only evaluate that if you actually rank both to see which performs better in a given environment.

After all, it’s nothing but performance that will get us to our financial goals and not the vehicle.

No Load Fund/ETF Tracker updated through 9/6/2007

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Sharp downside action caused by a weak payroll report pulled all major indexes lower, but the current Buy signals were not affected.

Our Trend Tracking Index (TTI) for domestic funds/ETFs moved lower to +2.91% above its long-term trend line (red) as the chart below shows:



The international index also remained +0.60% above its own trend line, keeping us still on the positive side.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link

ETF Investing: Adding Muscle To Your Portfolio

Even though ETFs represent “only” indexes for just about every conceivable investment orientation does not mean that they don’t have any muscle to propel your portfolio higher. A quick look at my dbase containing over 1,200 no load funds and some 500 ETFs shows that the 2 top performers (based on my M-Index ranking) are ETFs, namely FXI and PGJ.

Disclosure: While we hold small positions in FXI, we have none in PGJ.

It’s not secret that FXI has been the top performer last year; however, its tremendous volatility has kept many investors from taking the plunge. How can you participate in that powerhouse investment without taking too much risk?

For some of my more aggressive clients, I have taken a 10% position. During the recent market roller coaster, FXI lost 6% on some days and gained 5% on others. On balance, the week we purchased it turned out OK with a 5.25% gain.

Here is a plan you can follow if you are aggressive and attracted to the long term prospects of China via an investment in FXI. Ease into the market via a 5% position and, if it goes your way, add another 5%. The crucial part is to have an exit strategy in case this investment goes against you. I recommend a 10% trailing sell stop on your positions.

What’s the risk? If you invested 10% into FXI and got stopped out with a 10% loss, the total effect on your portfolio would be a negative 1%. If, however, FXI moves higher, as in the above example, and gives you an immediate 5% gain, you will have cut your risk in half.

If your risk tolerance is above average, this may very well add some desirable firepower to your portfolio.

Sunday Musings: Was The Last Bear Market A ‘Black Swan’ Event?

Very slowly, I have been trying to digest Nassim Nicholas Taleb’s book “The Black Swan.” It’s an incredible piece of work about the impact of the highly improbable.

Nassim explains that an improbable event has 3 characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.

The astonishing success of Google was a black swan event; so was 911 (you can add Microsoft and a host of other companies to this list, including any past bear market events). For Nassim, black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.

Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Nassim, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know.

For years, Nassim has studied how we fool ourselves into thinking we know more than we actually do. We restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world. In his book, Nassim explains everything we know about what we don’t know. He offers surprisingly simple tricks for dealing with black swans and benefiting from them.

This is not casual reading but very demanding, and it requires your full focus. If you like a challenge, and learn how to look at the world with a slightly different view, this book is for you.

No Load Fund/ETF Investing: An Argument For The Bulls?

Mark Hulbert of MarketWatch wrote a piece about a technical indicator that I had never heard of. In regards to the recent low volume days he says that there is one aspect that might actually quite bullish: On three of the past trading sessions, stock market volume triggered a bullish technical signal known as a “Nine To One Up Day.”

Here’s how this phenomenon is described:

This signal is based on the volume of all New York Stock Exchange-listed stocks that go up on a given day, expressed as a percentage of the total volume of all stocks that rose or fell on that day. On a day when rising stocks’ volume is the same as declining stocks’ volume, for example, this ratio would be exactly 50%.

A “Nine To One Up Day” occurs when this ratio is 90% or higher. According to Martin Zweig, who helped to develop this indicator several decades ago, such a huge imbalance of up volume over down volume “is a significant sign of positive momentum. In other words, when daily up volume leads down volume by a ratio of 9-to-1 or more, that tends to be an important signal for stocks.” The quotation comes from Zweig’s 1986 book, “Winning on Wall Street.”

He details further how this indicator is used and quotes other statistical tests. Personally, I don’t have an opinion either way, but I am constantly amazed at what arguments people try to come up with to support their case, be it bullish or bearish.

In my view, it is totally irrelevant whether you are bullish or bearish, what matters is the direction the market is taking, which it will do with or without your bias. Most investors would be better off to discard their opinions and only pay attention to where the market is headed and not where they think it should head. Eliminating these kinds of emotions is done best via trend tracking.

Determine the trend, establish your positions and provide for contingencies via an exit strategy. That’s all there is to increasing the odds of a successful investment in your favor.

Special No Load Fund/ETF Tracker Update For 9/10/2007

Continued volatility had the bulls and bears in a tug-of-war all day. Rallies, as well as pullbacks could not be sustained and we ended up essentially unchanged. I believe that this kind of uncertainty will stay with us into next week when the Federal Reserve meets to decide if any changes in interest rates are warranted.

Our Trend Tracking Indexes (TTIs) meandered as well and are hugging their respective trend lines as follows:

Domestic TTI: +3.05%
International TTI: -0.06%

Given the current up and down in the market place, I won’t read much into the fact that the international TTI just slipped below its trend line. As I previously said, my exit point for my international positions will be a 7% trailing stop loss. Surprisingly, they closed up for the day. Go figure.

Trend Tracking: ETFs or No Load Mutual Funds?

In my advisor practice, my mode of operation is to use both, ETFs and No Load Mutual Funds depending on what I’m trying to accomplish. Generally speaking, I prefer ETFs when investing in more volatile areas such as sectors and countries. This eliminates the problem of possibly increasing costs by having to deal with early redemption fees.

Of course, my main criterion for using either is the performance and ranking as per my M-Index. After all, only performance will grow your portfolio. However, if your preference would be the use of no load funds, how could you circumvent frequent trading rules and other charges?

MarketWatch featured a recent story titled “Trading Places,” which describes the benefits of having an account at a progressive fund company such as ProFunds. Having an account there entitles you to trade as frequently as you wish among ProFunds’ 13 single-beta funds and money market fund. Additionally, you have access to leveraged and inverse funds.

ProFunds momentum data are listed in my weekly StatSheet for easy tracking. Rydex has a similar program you might want to look into. If your preferred investment vehicle is mutual funds along with the freedom to trade as you wish, you owe it to yourself to check these companies out.

Disclosure: I have no affiliation with either company or any investments in any of their funds at this time.

No Load Fund/ETF Investing: When Do Bull Markets Die?

MarketWatch recently featured Jim Stack, editor of the Investech newsletter as saying that “Bull Markets don’t die of old age, they die from deterioration and economic imbalances, and we are seeing economic imbalances now.”

That’s been my experience as well, and I agree with his assessment. While he did not predict a speedy end to the bull—election-year politics may help it run longer—he now advocates a cash position of some 50%. However, he also recognizes that the market run could continue for another 16 months.

While all of his arguments are valid observations, the fact remains that they are still guesses or predictions about the future. That’s the problem I have. I can’t agree with making changes to investment positions just because this or that event may or may not happen in the future.

My preference is to see actual changes in trends and prices, which can be measured, before adjusting my investments.

No Load Fund/ETF Tracker updated through 9/13/2007

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The bulls had the upper hand and the major indexes ended up in positive territory.

Our Trend Tracking Index (TTI) for domestic funds/ETFs moved higher to +4.03% above its long-term trend line (red) as the chart below shows:



The international index also remained +0.84% above its own trend line, keeping us still on the buy side.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

From The ETF Archives: Beware Of Low Volume ETFs

Since ETFs trade like stocks, large Bid-Ask trading spreads can eat into your potential profits. As a general rule, this does not appear to be a problem with ETFs that are heavily traded. To demonstrate, at the time of this writing, I checked out the spreads for 2 ETFs that I don’t have any positions in at the moment.

Let’s take a look at EFA, one of the most heavily traded ETFs with a daily average volume of some 7.5 million shares. The current Bid-Ask spread is 76.66-76.67, which is a difference of 1 penny.

Contrast that with DGG, and an average volume of just over 7,000 shares, and you will see a Bid-Ask spread of 32.13-32.19, which is a difference of 6 pennies. If you want to look at it as a percentage of the current price, the difference becomes even more glaring.

Again, this is only one aspect of selecting an ETF, but a very crucial one. More importantly, low volume will also make it more difficult to get out when your sell stop point gets triggered and the exit doors become more crowded.

Just because new ETFs are being offered and cover a unique area does not mean that you should invest blindly. My rule is to watch newcomers for about a year or so to see how pricing and volume develops.