Morningstar recently pointed out a few of the drawbacks of indexing.  They highlight the fact that all of the money flowing into hot sectors and global regions boost the price of the underlying stocks. But, trends change and the money can sometimes flow out just as quickly. If you are allocating in these hot areas and don’t want to lose your shirt, keep these points in mind:

  1. Don’t be too heavily invested in one sector, asset class or global region,
  2. Have a stop-loss set at 8% off the high, or when the ETF goes below its 200-day moving average, whichever comes first.

No one is talking about telecom or biotech ETFs that have been top performers for the last month.  iShares Nasdaq Biotechnology (IBB) is up 6.8% for the month and Telecom HOLDRs (TTH) is up 6.4%.  Those willing to put in some work and discipline could find sectors or regions before others.  Morningstar is right though, momentum investing has become that much easier with ETFs.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.