November 23, 2007 at 6:00 am by Tom Lydon
With many of the year’s most popular ETFs starting to look shaky, it’s a good time to look at exit strategies.
IShares FTSE/Xinhua (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ), Claymore BNY/BRIC (EEB) and iShares MSCI Brazil (EWZ) are in the top five performers over the past 12 months.
But that doesn’t mean they will stay that way, says Tom Lydon, president of Global Trends Investments.
One reason is that they are 20% or more off their highs. IShares FTSE/Xinhua, for example, returned 153.4% over the last year, but the share price was 177.40 on Tuesday. The ETF topped out at 218.51 on Oct. 31.
Like iShares, PowerShares Golden Dragon peaked at 38.72 on Oct. 31, and closed Tuesday at 31.86. The ETF returned 132.9%. Claymore reached 57.90 and closed Tuesday at 51.55, with a 113.9% return. IShares MSCI Brazil hit 86.15 on Nov. 8 and dropped to 81.38 on Tuesday, still returning 108%.
Cutting Losses
The Brazil ETF, Lydon says, would be on his firm’s watch list to sell. Investors should get out if an ETF loses between 5% and 8%, he says.
A disciplined sell strategy is essential, he says, because too often investors are impressed by trailing returns.
But eye-popping returns can blind investors to the fact that when an ETF is on a losing streak, it is sometimes harder to make up ground.
For example, many who understand that emerging markets are volatile will shrug off a 20% loss as temporary.
Lydon says they are right to a point, but when declines reach 50% an investment has to double in value just to break even.
Moving Averages
Lydon also watches an ETF’s 200-day average to see if the price declines are temporary or if they show a long-term trend by breaking below a key support level. A sustained fall below the average often means there’s a more fundamental problem.
IShares FTSE/Xinhua, for example, hasn’t dipped below the 200-day average, but it has dropped more than 8% off its high, so it would be a sell. The firm buys when an ETF stays above the 50-day average and is rising.
IShares MSCI Brazil has dropped about 5.5%, but it hasn’t dropped below the 50-day average yet. That puts it on the watch list, Lydon says.
Global Trends Investments, with $70 million under management, has model portfolios, primarily focused on ETFs. The firm’s model growth portfolio has gone to about 55% cash over the past several weeks, Lydon says.
Over the past 12 months (through Oct. 31) the portfolio has returned 24.8%, against 12.8% for the S&P 500.
The portfolio’s heaviest weight is in WisdomTree Pacific Ex-Japan Dividend (DND). It hit a new high of 94.17 on Oct. 31.
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