The available funds from the FXI sale were deployed into the iShares MSCI Malaysia (EWM) and iShares Nasdaq Biotechnology (IBB). In making these buy decisions, we used all the criteria mentioned above plus the short-term momentum for one day, one week, two weeks, three weeks, one month, and so on. When we sold FXI in January, Malaysia was one of the best performers in December momentum, so was biotech.
Malaysia is an example of how human intervention comes into play in our buying strategy. That country isn’t as liquid as China, and it’s more thinly traded. (We sold EWM on 2/27/07.) If we’re selling $5 million or $6 million out of China, we did not want to put the total into EWM. That would have provided too much exposure. As a result, we put in half, and took into account not only the technicals but also the fundamentals. The question we asked was this: If Malaysia is a neighbor of China, and China is declining, why should Malaysia be going up? The answer at the time was that Malaysia has international companies with beach heads in China, but it’s also a country concerned with being too China dependent. The technicals were there, but the liquidity was not. (We sold EWM on February 27, 2007.)
Building and unwinding trades
Our portfolios tend to be more tactical than strategic, which is why we would even consider buying EWM. Based on an advisor’s size and the amount of money invested, it’s a lot easier to buy $1 million than $5 million of an ETF like EWM. Alternatively, if you have $500 million and you’re looking to invest $10 million in a thinly-traded ETF that could be a difficult trade to get through in a short period.
We tend to buy ETFs in small blocks until the desired amount is filled— sometimes it takes hours to work the trade. When the order is complete, equally priced shares are allocated among the various client portfolios. If we’re putting in $5 million into an ETF, and it only trades on average $20 million per day, we know a block for $5 million will not go through easily. It will affect the price.
When fully invested, our client portfolios might appear to be a little aggressive, but we have specific stop/loss points for every position. One of our clients is a 72-year-old widow with a $1.5 million ETF-only portfolio. Until about two weeks ago, we had 50% of her portfolio in domestic ETFs and 50% in global equity. Today it’s 50% domestic, 40% money market, and 10% international. There is no fixed income in it, yet she needs the income. But every month, money is withdrawn from the growth. As opposed to a traditional buy and hold, strategic 50% stock 50% bond portfolio, we’re able to do much better on the return front with a lot less risk. (Our portfolio was up 10.3% net for the 12-month period ending February. In comparison, for the same period, the S&P 500 was up 9.8%.)
The key here is having an investment discipline that includes an exit strategy. It helps protect a portfolio in declining markets, removes much of the emotion from investing, and allows investors to choose from a broader universe of ETFs.
Tom Lydon is CEO of Global Trends Investments, a Newport Beach, CA advisory. GTI was launched in 1996 and today manages some $65 million in assets with an average account size of $850,000. Lydon is also editor or the popular ETF web site, www.ETFtrends.com.