I have talked about the importance of only using ETFS with high volume to be sure that you can enter and exit at a moment’s notice. One reader had this experience:
I have a comment and question about the Nov.2 column about sell stops.
The comment: I ran into a different kind of problem recently with sell stops. I had bought a relatively low volume ETF (from a sort of tout list, I’m ashamed to say, it looked ok when I researched it– but, since I’m an amateur, I hadn’t realized the volume was low.) So when the sell stop kicked in, I was selling and it seemed nobody was buying, the sell price spiked way down before all of the position was liquidated by the automatic sell request. After this, I divided my sell stop into halves for awhile, but this was tedious so I just tried not to buy into a low volume ETF that I’d never really heard of before.
Q1: Any comments on my problem? What kind of volume would you consider necessary?
Regarding stops:
Q2: I wanted to confirm: Are you suggesting to “utilize” a stop in tracking one’s holdings, but not place it officially until you use it? Or should you actually have it in place at all time officially with your broker?
The reason I like stops is it lowers my stress. I have a tough job and am often on the road where I may not get time to log on every evening. I’ve tried to do more short-term trades but that doesn’t work for me. The stop lets me sleep peacefully.
For the most part, volume tends to increase with the size of an ETF. Generally speaking, you want an ETF with at least $50 million in assets. If you were to place a $100k order, you’d want average daily volume to be at least $2 million—more would be even better.
A real liquid ETF like QQQQ, for example, currently sports a daily average volume (according to Yahoo) of over $4 billion, which represents almost $99 million shares. Buying or selling millions of dollars of holdings in such a liquid environment is no problem at all, as I have found out in the past.
While not every ETF offers such liquidity, many have average volume in excess of $4 million traded every day, which will be sufficient for most investors.
To confirm your second question, I never enter a sell stop ahead of time. I look at my spreadsheet reflecting the day-ending prices and, if a stop has been triggered, only then will I enter my sell order the next day.
Disclosure: We currently have holdings in QQQQ.
Comments 6
Ulli,
An ETF that works great in uptrending markets has been VXF, it used to be lightly traded, but as people wised up and saw what great performance it has had in cyclical bull markets it has a little better volume. I own it from time to time and as I understand it is the Wilshire 5000 minus the S&P500; making it the Wilshire 4500 Index. Rather than buy a whole bunch of ETFs I have found that one to do as well if not better than the average of 3-4 ETFs in most cases. It does come down hard during bear market declines and that is what a trend follower wants to happen once he sells when the trend turns down.
George, if I'm looking at VXF correctly, its ADV in shares trades is about 100,000 shares per day. For me, if I'm correct, that would be way too small an amount of shares traded per day, which makes it risky, if I were to consider this ETF. However, I am really an option trader; like a lot more shares to be traded than this to consider options on an ETF or stock; and I don't like to trade, normally, unless there are at least minimum of a million shares traded per day, preferably higher.
George, I should have left this, in my previous comment, because I think it's important. I respectfully disagree with you about putting "all your eggs in one basket" with a single ETF, rather than several, if you are using ETFs, and don't have several other equities. If you use only one equity, whatever it is, it's too risky for me, regardless of how it's performed, in the past. Some wise traders have advised me not to put more than 10% of my trading account into one position. For me, it's like taking an elevator, in a high-rise building. If I only have one position, albeit one equity, it's like riding an elevator, which only has one cable; my risk is too high, for me. I want to ride an elevator, which has several cables; that way, if one cable breaks, I have some back-ups to catch me. By the way, I'm still a big advocate of stop sells, too.
George, I overlayed VXF onto the S&P; 500, in my chart program. As I read the overlay, I get see this: VXF virtually follows the S&P; 500, which reminds me of a lot of mutual funds, except VXF did slightly better from 7-23-09 thru 10-22-09; then VXF did just about the same as the S&P; 500 until 10-30-09. As I see it, from then, until now, VXF is doing worse than the S&P; 500, except for doing slightly better than the S&P; 500, the last few days. However, I'm not a financial professional, so I can't give any advice regarading how I view the performance of VXF and what you should do with regard to investing in VXF. I can write you what I, personally, would do with it, though — sell it and get into something with a higher return.
John,
I also use AMAGX AMANX nad FUNDX mutual funds during uptrending markets. Look at VXF as compared to SPY from say June 2003 to January 2008 for a better look.
Thanks
George, My program doesn't go back any further than June 2006. And it's hard to be real exact, when I have to squeeze several years of data into the screen, too. However, VXF, to me, still looks pretty close to the S&P; 500, all of the time, except as I noted earlier and also except doing slightly worse from about July 20, 2006 to about February 2007 and slightly better from mid-March of 2007 to mid-May of 2007. Actually, overall, to me, VXF still seems to be very close, almost identical, to the S&P; 500, as far as my charts show. To me, the differences between the two seem minute. As I wrote, if it were me, and I can't advise you, because I'm not a financial professional, I would dump VXF and buy something with a greater return. I trade options, but I still want the underlying to move (well that's not always true, either), as for the most part I just buy and one put or one call on an underlying without getting into the more complex spreads where you have to buy several options for a strategy. So, in general, I'm looking for an underlying to move, just like people who buy and sell whaat I call underlyings: stocks and ETFs (You can't trade options on mutual funds or bonds, as you might know.)