Reader David pointed to a link titled “ETFs With Little Volume but Big Returns, Revisited” and commented as follows:

This article discusses “wide-spread confusions” re the significance of an ETF’s average daily volume, or per-minute dollar amount traded.

I am one of those confused, and I would appreciate your discussion of this article. I recall you writing that you avoid ETFs with low daily volume, such as TF (vs. THD) or TKF (vs. TUR), even though they are included in the weekly stat sheets.

The article is quite lengthy, so I will hone in only on the following:

All of this being said, there still exist “screening metrics” that appear from time to time in the ETF media or are simply part of an institution’s or an advisory firm’s “rules of thumb” that “require” that ETFs/ETN’s trade a) 100,000 shares on an average daily volume basis b) Have a certain level of AUM within the fund, i.e. $100 million and c) Have to adhere to a specific width between the published bid/ask quotes. We at Street One Financial find that because there is such a bevy of ETF/ETN products in the universe (equity, fixed income, commodity, actively managed, currency, long/short, etc.) that rules of thumb such as those above are not consistent with reality and often limit the strategies available to the ultimate end user of the ETF/ETN.

In essence, these “rules” address ETFs and ETNs as if they were individual small cap stocks from a feasibility of trading standpoint and largely this practice of installing such screens is akin to investing with “blinders” on. And in a world of increasing ETF usage, limiting your strategies due to embedded misconceptions regarding “trading volume and liquidity” simply handcuffs your overall performance and competitive ability because in order to keep pace with peers, one must often venture into new strategies as they become available or at least have the capacity to be nimble where necessary…

It’s hard to understand how someone could consider common sense screening as “investing with blinders on.” While some of the screens maybe a little farfetched, investing in ETFs without basic consideration to volume and bid/ask spreads is simply being ignorant.

Here’s my take on it. If you are an investor with small amounts of money to deploy, there is nothing wrong with selecting ETFs with a small asset base and or low trading volume. That’s one of the reasons while my weekly StatSheet includes those types of ETFs as well.

However, if you are a large investor or, as in my case, manage other people’s money in the 10s of millions of dollars, you better use some kind of screening mechanism to assure you can get into and out of the market without too much slippage.

As an example, you do not ever want to get caught trying to trade out of an ETF with an average daily volume of 100,000 shares when you are trying to liquidate 500,000 shares. You will move the market and will not get efficient execution and may take more of a haircut than you like.

On the other side of the spectrum, there is SPY. It has an average daily volume of over 162 million shares (over $1 billion), which accommodates just about any size of investor.

Personally, in my advisor practice, my screening rules are fairly simple. I do not invest in any ETF that does not have an average daily volume of $10 million. Having used that rule for a while, I have always been able to get in and out of a position very effectively.

How many ETFs exist that sport this kind of volume? Out of the 500 I track, I have identified 87. That is enough to pretty much cover any asset class you need or want to have exposure in.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The first trading day of the year made the week, and the S&P; 500 added 0.8%.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +4.82% (last week +5.09%) and remains in bullish mode.



The international index has broken above its long-term trend line by +6.90% (last week +7.02%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.



[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Sometimes, Wall Street simply chooses to ignore good news. That was the case yesterday as the ADP National Employment Report estimated that 297,000 jobs were created, which was nearly triple of expectations. Another report showed that non-manufacturing expanded rapidly and at the fastest clip since 2006.

The markets sold off early but clawed back and managed a modest but steady climb above the unchanged line.

While the ADP report is a precursor to Friday’s unemployment and payroll numbers, it does not always translate into an exact match. Maybe that’s why the market reaction was more or less muted. Other reasons could have been the stronger dollar, and lagging energy and precious metals. More importantly, stocks are getting pricey with the S&P; now having moved some 11% above its 200-day average, which begs the question as to how much higher we can go without a meaningful correction.

As much as the Fed’s QE-2 program was cheered as a plan to stimulate the economy, fears are now surfacing that this program may we cut back if it appears that its need is no longer as crucial as it appeared a few months ago.

Right now, all eyes are on Friday’s jobs report which offers hope that job gains may have fared better than previously anticipated. Of course, with the major indexes hovering at these lofty levels, perfect jobs numbers may already have been priced in.

While equities sold off early morning yesterday, the damage was very much contained as the afternoon session brought in renewed buying and kept losses at a minimum as the chart above shows.

Commodity prices were pressured with gold and silver taking the brunt of the hit. Gold dropped below the 1,400 level while crude oil traded below the $90/barrel mark. Profit taking played a big role as commodities have been on a strong upward path.

The explanation for gold’s decline was improved expectations for a global recovery, which presumably reduces uncertainty and causes investors to prefer equities over hard assets. Let’s see what happens not if but when new signs of economic headwinds surface unexpectedly again. Additionally, beginning of the year portfolio rebalancing could have played a role as well.

Today we’ll be looking at non-manufacturing data and the ADP employment number, which is the precursor of the all important jobs report due out on Friday. Any positive surprises can easily move the markets towards their all-important 1,300 level of the S&P; 500.

Disappointment with any of these numbers could make investors question as to whether these lofty levels of the major indexes are actually justifiable.

Picking up on the positive momentum from 2010, the markets welcomed 2011 yesterday with their biggest rally in nearly a month. For most of the day, it looked like a triple-digit pop in the Dow, but a last hour fade took back nearly a third of the gains.

Nevertheless, the rally was broad with most sectors participating. Commodities moved higher along with Crude oil, which topped $92/barrel for the first time since late 2008. Gold slipped slightly, the dollar was flat, and interest rates inched up causing bonds to slip just a bit.

Asia and Europe led the markets, and the domestic indexes followed along right after the opening bell as the chart above (courtesy of MarketWatch.com) shows.

Some economic reports, while not earth shattering, helped the bullish cause. Manufacturing strengthened in December, and better-than-expected construction spending in November cheered traders on Wall Street.

While this was a good start to a new year, we’ll have to wait and see if this upward momentum can be sustained once some of last year’s issues move back to the front page again. The market indexes are hovering around very lofty levels and have moved substantially above their respective long term trend lines.

Let’s hope that this picture does not end up in the “pop and drop” syndrome, which can be frequently observed once markets have moved up too far and too long without any correction.

Right now, however, we’re off to a good start, so let’s enjoy it for the time being.

Hat tip goes to reader Mal for pointing to this article “This Goldman Sachs Guru Sees 2011 as ‘the Year of the USA:’”

Jim O’Neill shot to fame by predicting the staggering rise of emerging-market economies. Now the head of Goldman Sachs (GS) Asset Management, O’Neill recommended investors buy into so called BRIC economies of Brazil, Russia, India and China a decade ago.

O’Neill’s predictions may seem farfetched to U.S. investors mired in years of pessimism following the financial crisis. But they should recall that his prescient call on the BRIC economies at a time when most investors were still focused on the aftermath of the dot-com bubble’s bursting seemed even less likely. You may not want to ignore him again.

There you have it—one man’s opinion. While I agree that the U.S. market may have more upside potential, it’s not because things are so hunky dory here, it’s because very likely they will be worse elsewhere.

Domestically, we certainly will have to deal with a host of issues. Real Estate is still tanking with no end in sight; unemployment is not showing any signs of improvement and gains in one area, like private payrolls, may be offset by losses in other areas, such as workforce reductions on all levels of government.

Budget shortfalls and red numbers wherever you look may result in a host of cities and municipalities filing bankruptcy in order to reduce debt and reorganize.

Nevertheless, as dire as that sounds, things may very well be worse in other parts of the world. Europe has its own debt issue to deal with, and it’s just a matter of time until one overburdened and debt ridden country is no longer willing to play musical chairs and ends up defaulting. It’s no question in my mind that a domino effect will be the consequence.

Other major global players are mired in their own real estate and debt bubbles, which could burst at some time during 2011. China, Canada and Australia come to mind with India’s economy reaching a critical boiling point.

In the end, when and if some of these issues turn into problems, the U.S. may not be such a bad place to invest after all. There’s a good chance that the dollar will be resuming its uptrend, especially if bad news from Europe prevails this year.

A good way to track the dollar’s progress, or lack thereof, is via the ETF UUP. While it’s still hovering below its long term trend line, watch for a break above, whenever that may occur.

Again, my theme for this year will be to look for changes in trend direction via our Trend Tracking Indicators (TTIs) and by watching individual ETFs break above or below their respective trend lines. Using that in combination with our trailing sell stop points, should put you in a position of better controlling your downside risk.

After all, just because some predictions are rosy does not mean the market can’t fool the majority of investors again just as it did in 2008. It pays to always be prepared.

Disclosure: No holdings in UUP