Redefining Strategy for ETFs

The markets were as volatile as ever Thursday, making it a good one for an article I wrote to appear in Investment News, outlining our strategy when it comes to exchange traded funds [ETFs].

Many advisors are dealing with scared and uncertain clients in these markets, and it really helps to have a strategy to protect them. We’re even seeing some shifts in the long-term buy-and-hold strategy, because markets are hitting levels not seen in decades.

For years, we used the 200-day moving average as a guide when it came to buying and selling ETFs. When funds are above that point, we look at buying; when it drops below or 8% off the high, we sell. But the markets have fallen so sharply and swiftly that with that strategy, we’d have to wait a long time before we begin to capitalize on a new uptrend.

That’s why we’ve recently instituted the 50-day moving average. When a fund moves above its 50-day trend line, we’ll invest 25%; once that initial investment appreciates 5%, we’ll invest another 25%. By then, the 200-day moving average should be in sight. The 50-day moving average will also be our sell point, as well.

We put our strategy into play a while ago and currently have our clients in cash, in a government money fund, which invests in securities issued by or guaranteed by the U.S. government. The low yield of this fund, currently at 1.38%, isn’t terribly exciting. But until the markets are back on an uptrend, we’d prefer to keep our clients in the safety of a cash position instead of in a higher-yielding fund with more risk.

You can read more about our strategy in our book, iMoney: Profitable ETF Strategies for Every Investor.

Comments

[Augustus:]

As I understand your article, you still use the 200 dma. When price is below the 200 dma, AND the 50 dma is also below the 200 dma, then use the 50 dma as the signal for the 25% and 25% investments. If price declines below the 50 dma, sell out the position again and wait. Continue to use the 50 dma as the trigger line until the 50 dma exceeds the 200 dma and then follow that for the trigger, combined with the 8% drop.

Is the 8% drop sell trigger employed with the 50 dma when it is below the 200 dma? Suppose I'm up 10% above the 50 dma which is still below the 200 dma. Do I sell on an 8% drop from there or wait until a break below the 50 dma?

Finally, if there any data available showing how the outlined trading method would have worked in the past with the major indices along with the increasing number of trades? Doing the additional dance on the over / under of the 50 dma could lead to quite a number of additional whipsaws. Sometimes the seemingly logical tweaks do not improve the returns.

Thanks for putting out the article.

2008 Nov 14 09:13 AM

[thyname:]

Which Moving Average are you using, exponential or simple? There is a non-neglibilble difference between the two. Also, considering the market volatility, do you consider intra-day price swings, or just the closing price?
thanks

2008 Nov 14 12:44 PM