With ETFs, It’s A Trader’s Market

The face of exchange traded fund (ETF) investing is changing, as well as the traditional buy-and-hold approach. The reasons are many as states in an article I wrote for Investment News, explaining why the ETF industry is ripe to become a traders’ market.

The buy-and-hold strategy is in intensive care. But many don’t seem prepared to do away with the idea altogether. In which case, a better strategy may prove to be a tactical overlay model using exchange traded funds in which 60%-70% is buy-and-hold and the remaining 30%-40% is actively traded using the 200-day moving average.

When choosing an ETF, there are many choices, so here are things to consider before jumping in:

• Liquidity. Be sure to check numbers before buying, as an ETF that does not have assets will not be as liquid as the larger ones. A good point of reference is $100 million in assets.
• Commissions. Be aware of the brokerage fee, as the flexibility of an ETF also comes wit a brokerage fee. Every firm is different in the way commission charges are made.
• Average Pricing. When trading the same ETF for multiple accounts, it’s possible that each account could get a different price if the ETF was traded for each individual account. If you do a block trade for the full number of shares you want to buy or sell, then you can allocate the shares to the individual accounts with the same average price. This ensures that all clients will receive the same purchase or sale price.
• Limit Orders. When placing a trade, you can put the trade in at market and execute it at whatever the going rate is at the time you submit the order. This allows you to place a cap on what you are willing to pay and keeps your price within a specific range.

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Comment by mario cavolo

2009-02-18 00:26:04

Your thoughts here hit a particular point about selectively holding longterm ETF’s or stocks, perhaps 20% to 50% of your portfolio, and trading short term with the remainder. For example, I’m recently long PVR (coal) with what should be a safe high dividend and minimum downside, perhaps a touch early, but its a longterm. Waiting a bit with the recent plunge, I’m thinking Altria’s next for example, and several others. For longterm ETF’s, we should look at healthcare, oil/energy, also, Brazil EWZ which pays a nice dividend, also I remind you of the China FXI/Taiwan EWT /Singapore EWS reality. Yes these markets are not decoupled from a further plunge which could easily happen, BUT these countries are CASH RICH to a degree that westerners truly do not comprehend. I live in Shanghai almost 10 years and believe me, there is so much cash here, even in the hands of the lower middle class. They (100-300,000,000 chinese, depending on who you ask) go about their business while all around them economics are melting down. Why would a person be that concerned if you also typically had well over $100,000 USD in the bank, owned 2 or more apartments mortgage free, and could comfortably live on a budget of less than $1000/month which includes eating out very often? Its a different world and mentality. Hmm, I’m going to type up another article on this line of thought. Thanks for being excellent Tom. Cheers

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