July 31, 2007 at 3:00 pm by Tom Lydon
Last week’s market plunge and subsequent exchange traded fund (ETF) decline unsettled many investors. However, if you had an exit strategy with specific stop-loss points, then the drop was hopefully less stressful for you as it prevents small loses from turning into there-goes-my-house losses.
If you followed your exit strategy, you more than likely sold several ETFs last week. But what do you do if the ETFs you sold end up rebounding? Try this:
- Treat the newly available cash as "free agent" funds. Just because you sold an ETF doesn’t mean you’re obligated to buy it back when it rebounds.
- Look for ETFs that are above or rising above their trend lines.
- Look for ETFs with positive, relative strength. When markets rebound off a low, it’s usually those with the greatest momentum that enjoy sustained uptrends.
For example, we sold iShares Russell 2000 Index (IWM) for our managed clients when it went below its 200-day moving average because that’s part of our exit strategy. IWM’s recent performance is a general indicator that small-caps are in a declining trend.
Rather than waiting for small-cap stocks to regain strength, look to other market sectors such as energy ETFs. PowerShares WilderHill Clean Energy (PBW) never went below its trend line during last week’s drop and is doing well overall. (For disclosure purposes, we are not buying this ETF for our managed clients.)
Tags | UNG
August 14th, 2007 at 5:51 pm
That’s another positive I feel etfs have over mutual funds….You see how Tom sold when broke 200 day…well, in terms of mutuals, people tend to just buy a mutual fund an kind of forget about it…At least w/ etfs…they trade like stocks..yet can be diversified like a fund…and can be bought and sold like an individual equity….That is a quality regarding etfs I trul admire…I think it’s indeed fabulous.
Regards-
Adam Weinstein