ETF Update: Actively Managed ETFs, Using the Moving Average

Was the first actively managed ETF a good idea after all? Chuck Jaffe doesn't think so.

The Bear Stearns Current Yield (YYY) debuted on March 25, and it's not going to look any better as the active ETF sector grows, Jaffe says. His problem is not with the fund's troubled namesake, though. He questions whether the fund is going to live up to anyone's expectations.

The fund purchases short-term debt to generate its income in the form of government securities, corporate debt, mortgage-backed and asset-backed securities, municipal bonds, foreign debt obligations and so on. The fund comes with an expense ratio of 0.35%, competitive when compared with the average money market fund expense ratio of 0.47%.

But is it going to deliver superior performance? Jaffe and Jeff Ptak at Morningstar think not: making trades in the fund would erode any expense advantage. One researcher says the fund is not much different than holding cash.

The other recent entrants into the actively managed ETF playing field are:

• PowerShares Active Low Duration Fund (PLK)
• PowerShares Active Mega Cap Fund (PMA)
• PowerShares Active AlphaQ Fund (PQY)
• PowerShares Active Alpha Multi-Cap Fund (PQZ)

Only time will tell with these funds as they build up track records. Investors are watching for performance over time, and if they deliver, perhaps the market will go for this new breed of ETF.

Using the Moving Average When Investing In ETFs

Some investors want to use ETFs to exploit short-term movements in the markets.

Loren Fleckenstein for Trading Markets gives a primer on using 10-day and 30-day moving averages and the crossovers as a signal of a trend change.

The crossover occurs when a shorter moving average (the 10 day, in this case) traverses the longer moving average. But Fleckenstein says this information shouldn't be considered alone. Instead, consider price breakouts and volume as confirmation of a trend shift.

One example can be seen in the chart above: while the 10-day line is well above the 30-day, volume fell - an indication that the market wasn't convinced that there was an uptrend.

This strategy differs from how we manage money. We let each sector, asset class and global region identify its own trend and when something crosses above its 200-day moving average, we consider that the time to buy.

With regard to volatility, there's nothing magical about the 200-day moving average. If the markets are rocking and rolling, you can consider the 50-day moving average. Bear in mind that it will be more sensitive to movements and it could mean you'll be trading more.

Some might find a 10- or 30-day moving average is a bit too short-term for their tastes. It would require much more discipline, and for the average investor, it wouldn't work.