The best way to keep the emotional-investing habit in check when it comes to exchange traded funds (ETFs) is to have a strategy.

Our strategy hinges on the long-term trend line (200-day moving average), which represents the average closing price over a set time period. In less dire market conditions, investors would use an ETF’s 200-day moving average to pinpoint the best time to buy or sell.

But since most ETFs are currently trading far below that bar, we say, those looking to jump into the market might want to instead use a 50-day average. Recently, Katy Marquardt for U.S. News & World report asked us to explain this strategy and highlight any ETFs that currently pass the test.

First off, if you got into commodities or emerging markets or energy over the past three years there has been lots of volatility, so determine if this is a long-term position or short-term strategy and then protect the downside.

Protecting the downside is a way of avoiding risk in some volatile areas. A very simple rule anyone can implement is to look at the 200-day moving average of every ETF in your portfolio. For example, if you’ve got a commodity ETF trading below its 200-day average, the translation is that it’s in a downtrend. If you’re not going to buy and hold, and you’re looking for short-term opportunities, that opportunity may have passed and what you want to do is protect principal and sell until it goes back above that trend line.

There are a couple of areas in the past year that have been beaten up, including financials and housing stocks. People may say that’s ridiculous and that we’ll continue to see deterioration over the next few years in that sector, but when everyone is throwing the baby out with the bathwater, it’s usually a good time to buy. If you’re looking to take full advantage of trends, this is the way.

ETFs trading above their 200-day moving average:

  • CurrencyShares Japanese Yen Trust (FXY), up 9.7% year-to-date
  • PowerShares DB US Dollar Bullish (UUP), up 7.1% year-to-date

Dollar, Yen Exchange Traded Funds (ETFs)

For full disclosure, Tom Lydon is a board member of Rydex Funds.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.