ETF Strategies In Volatile Markets

The markets are as volatile as ever today, 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 awhile 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.

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Comment by nik

2008-11-19 03:53:59

hi tom,
your strategy described above did really bad in backtesting. are you sure this is working?
nik

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Comment by Tom Lydon

2008-11-19 10:14:44

Nik-

I’m not sure of the parameters you used for the back testing, but the math proves you would have avoided the lion’s share of two terrible bear markets in the past decade while participating in ‘98-’00 and ‘03-’07.

Respectfully,

Tom Lydon

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