A nice rally faded after the Fed announced that interest rates would be unchanged and remain at record low levels. The major indexes ended up barely changed.

Implied in the message was the hint that rates will move up, but not anytime soon. Furthermore, the Fed noted that that plans exist to end a host of programs designed to support the economy in the first half of 2010. Interpretation of the various statements pulled the indexes off their highs and pushed the dollar higher.

To me, it appears that the Fed will do anything to keep this fragile recovery going. Once stimulus plans come to an end, whenever that will be, that’s the moment of truth when rubber meets the road. In other words, does the economy have enough stamina on its own without trillions of dollars propping it up artificially?

Time will tell, but for right now the indexes are still stuck in a range and continue to bounce against overhead resistance. In the absence of a new impetus to create more upward momentum, we may be stuck in a trading range from which a breakout will eventually occur—we just won’t know yet if it will be to the upside or the downside.

The WSJ reports that ETFs are reaching the more remote corners of the world in “ETS Aim to Tame the Final Frontier:”

Exchange-traded funds are launching to focus on emerging-market nations, particularly the smaller ones that lack the allure of giants like India and China.

Market Vectors Vietnam ETF (VNM) started in August and now has $79.5 million in assets, while Market Vectors Brazil Small-Cap ETF (BRF), which debuted in May, has $606.3 million, says Morningstar. In addition, Market Vectors Indonesia Index ETF (IDX), which was launched in January, has $184.9 million.

While it is too early to tell which of these new ETFs will survive, I consider them only appropriate for aggressive investors. Sticking with the more general indexes, which may include exposure to some of these countries, is a more conservative way to participate.

Some of these ETFs may very well move sharply and erratically as individual stocks do, which does not make them a good candidate for trend tracking. The reason that trend tracking works well with mutual funds and most ETFs is that some of the volatility has been removed due to broad diversification.

If you get involved in ETFs of relatively small emerging countries, you are adding lack of diversification back into the equation, which makes it more difficult to apply simple trend tracking rules. Just because these products are offered, does not make them a suitable addition to your portfolio.

Steady long-term growth is preferable in my book as opposed to introducing a casino like element that may add a questionable outcome.

I have no holdings in any of the ETFs mentioned in this article.

Reader Pat had a follow up question regarding my recent post titled Head Fake.

Thanks for your response to my recent question about capitalizing on the inexorable rise in interest rates. HOWEVER, you did not really answer my question which was not to bemoan my loss in TBT but rather to determine how one can profit from the rise when it occurs.

Thanks. It is wise to address the inevitable in advance.

While it is indeed wise to plan ahead, going too far out would be simply trying to predict the future which, when tracking trends, I don’t engage in. The fact that we are on the dark side of a burst real estate/credit bubble of never seen before dimensions is cause for great concern. Trying to make any early guesses as to how this scenario may play out, is gambling at best.

My mode of operation is to wait and see which areas of the market place will develop upward momentum once stocks have corrected. You can easily track these changes by using my weekly StatSheet.

Here’s how:

Simply focus on the column titled %M/A, which shows you how far below or above its own trend line a fund/ETF is currently positioned. You want to watch for transitions when a fund moves from below its trend line (a negative number) to above its trend line, which then will be represented by a positive number.

Since the trend line is the dividing line between bullish and bearish territory, I will predominantly focus on these changes, especially when a fund crosses to the upside.

Once that line has been crossed, I will wait a couple of trading days, before placing an order to buy. Since many ETFs represent short positions as well, you no longer have to specially sell short, if that’s what you want to do—just use the appropriate ETF.

Letting the trend come to you first before taking a position, rather then you trying to predict and force the issue, will enhance the odds of you being successful. Sure, we all like to have that crystal ball but, since we don’t, working with trends is the best way I know of to identify changes in momentum.

Should I ever find that crystal ball, I am sure that I will get an invitation to Omaha, Nebraska for lunch to meet with you know who.

Reader Lou posed this question to get a better handle on ETF selections:

When two or three ETF’s you have been following are above the trend line equally how do you distinguish between them and which to buy?

I look at the M-Index ranking in the StatSheet first to determine any differences in upward momentum. Assuming they’re the same, I quickly glance at the 4-week column, which in most cases shows a difference in performance.

I tend to go with the ETF that has a higher number here, because it more accurately reflects current conditions as opposed to the M-Index number, which takes into account a larger time span.

If that is a close call too, I look at volume. I have discussed its importance many times; the higher the volume the better, as bid/ask spreads are smaller and higher liquidity makes it a snap to get into or out of positions without slippage. This is especially important when the markets correct, your sell stop gets triggered and you want to move to the sidelines in a hurry.

Last not least, if all of the above are the same for two ETFs, I take a look at the expense ratio. Maybe you can save a few dollars here but, when using trend tracking, this is really not as important as for a buy and holder, since we’re only exposed to this ETF for a limited time frame.

I also consult the figures in the MaxDD% column, which is explained in the glossary section of the StatSheet, however, due to lack of space, these number are not featured anywhere. I talked about them in more detail in “Using The Benefit Of Hindsight.”

Using the above suggestions may not always produce a top performer, but I believe that these ideas will improve your selections rather than not using any method or screening process at all.

Every so often a new study surfaces, which promotes the virtues of index investing vs. the use of “old fashioned” mutual funds. Here’s the latest titled “Cast your fortunes with index funds.” Let’s listen in:

Investors who continue to send money to actively managed mutual funds in the hope that managers will be able to beat less-costly index funds are going to lose out almost all of the time, a new study finds.

“In other words, going forward we expect that a portfolio of low-cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe,” wrote the professors.

Although it is not specifically mentioned, the entire study is based on buy and hold investing. If that were my mode of operation, sure, I might decide on low cost index funds as well.

Personally, I think making the case of a bad fund manager being lucky is just being plain silly. A “good” fund manager may have been able to pick better stocks in a bull market than a “bad” fund manager, but when a bear market strikes, just as we’ve seen in 2000 and 20008, both will lose money at an alarming rate.

The point that is overlooked in this study is that all equity funds (unless they’re bear market funds) and indexes are geared to work only in a bullish environment, and all will fail miserably at varying degrees in down markets.

I believe that both, mutual funds and ETFs, should be selected based on which might be most appropriate at the time an investment is made. A quick check of my data base M-Index rankings revealed that currently 29 no load mutual funds rank higher than 13 on the scale, while only 12 ETFs of the same orientation qualified.

Rather than trying to continue with study after study to try to come up with results that favor indexes over mutual funds, the case should be made for using an investment approach that keeps investors out of bear markets and invested only when the trend is bullish. It would avoid a lot of heartaches and end the discussion as to whether index funds are superior to mutual funds.

The WSJ reports that actively managed ETFs are slowly making headway:

Big-name fund firms are finally embracing actively managed exchange-traded funds, just not in the sweeping way many once envisioned.

A related factor: So far this year, investors have poured more than $40 billion into bond ETFs, while yanking about $20 billion from stock vehicles, according to the National Stock Exchange.

Again, I welcome all new options that expand investment opportunities. That does not mean that every new product is a sensible one for the individual investor, but at least it’s worthy of examination.

In the case of active ETFs, or any other new “invention”, I will not jump on the bandwagon right away, but watch price developments and volume for some nine months. That will allow me to better determine momentum changes and chart trend direction while examining comparisons with other ETF choices.

If these products hold up well, they will then become a part of my data base and serve as an additional resource for the next buy cycle, whenever that occurs.