No Load Fund/ETF Tracker updated through 1/28/2010

Ulli Uncategorized Contact

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

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

Continued downside momentum pulled the major indexes lower. It’s interesting to note that the international TTI has now passed the domestic TTI by moving closer to its respective trend line and a potential sell signal.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +3.13% keeping the current buy signal intact. The effective date was June 3, 2009.



The international index has now broken above its long-term trend line by +2.97%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

[Click on charts to enlarge]
For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Reader Help Requested

Ulli Uncategorized Contact

Reader Russ had a great suggestion and commented as follows:

I enjoy your columns and blogs and have benefitted from your recommendations to set firm sell points. My question/request is on finding information on a specific fund or ETF within the stat sheets.

It would seem very helpful if there would be a search feature that one could enter the name or symbols for a fund/ETF to see if it is in the stat sheet rather than scanning through all the pages to see if it is there. Just a suggestion to speed things up.

This would indeed be helpful for many readers, especially as the offerings of ETFs increase. Since the StatSheet files are in PDF format, I am not aware whether or not you can actually search through them.

I found a program on the internet called Powergrep that will actually do that and a lot more. I have not tried it so I can’t vouch for its accuracy, but they offer a free trial.

If you are aware of an easy way to search through PDF files, please share it with me.

An Easy Oversight

Ulli Uncategorized Contact

The WSJ featured a story on the discrepancies between an ETF’s performance and the underlying index it is supposed to track:

True believers in index funds are eyeing a problem churned up during the market’s turbulent passage over the past two years—tracking error.

That is where a fund’s performance veers from the index it is supposed to track. This is a problem for index funds covering smaller slices of the market, whose member stocks are less liquid and sometimes more volatile than broad-market benchmarks.

Tracking error isn’t much of a problem for funds following the most-used broad-market index, the Standard & Poor’s 500-stock index.

In light of the tracking situation, investors should pay attention to the differences among the niche index portfolios. That is particularly true for buyers of exchange-traded funds, which unlike open-end stock funds, are predominantly index-linked.

Look at the markedly divergent results of two ETFs that track the same international-stock index—iShares MSCI Emerging Markets Index ETF (EEM) and Vanguard Emerging Markets ETF (VWO). Both follow the MSCI Emerging Markets Index. But the Vanguard ETF gained just over 76% last year, while the iShares offering was up nearly 72%. The index itself was up 78.5%. In 2008, though, the Vanguard ETF was down almost 53% while the iShares fund fell about 50%. Both beat the index, which was down 54%.

One factor here is cost. The Vanguard ETF charges much lower yearly fees than the iShares fund: 0.27% of assets compared to 0.72%. That savings is passed directly to the investor and boosts returns.

While I am aware of these discrepancies, they will have no bearing as to whether I take a position in either fund once the upward trend dictates that I do so. However, my point here is a different one.

A reader, who had seen this article as well, mentioned in passing that VWO, having lost 53% in 2008, certainly had made up its losses with a stellar performance of +76% in 2009.

That is not correct, and it’s an easy mistake to make.

Say, you invested $100k in VWO the beginning of 2008. With a loss of 53%, this reduced your portfolio value to $47k at the end of 2008. In 2009, this ETF gained 76% bringing your portfolio value back up to $82,720. That means, despite the great gains in 2009, you still need to make another 20.89% just to get back to break even.

Such is the enormous power of a bear market. You need to avoid it at all costs. Otherwise, you will be stuck trying to make up losses which, despite market cooperation, may take years to accomplish.

Disclosure: I have no positions in the ETFs discussed above.

Bumping Against Trading Limitations

Ulli Uncategorized Contact

With the markets having corrected three straight days in a row last week, some readers are getting close to having to execute sell stops and/or contemplating how to reenter the market should this downturn to be short-lived.

Reader Bruce had this to say:

Preparing for a market exit, I have been reading up on the short-term trading rules for funds in my 403b account. Most seem to forbid a repurchase in less than 30 days.

Could you discuss the typical time frames that the TTI in the past has kept money out of the market, and any problems with short-term trading rules? I guess one option would be to just buy back in the market with different funds.

Unfortunately, there are no typical time frames. You just have to deal with the facts as they develop. Sure, if your custodian will not let you re-purchase the same fund for 30 days, then simply use another one that is comparable. On the other hand, if you get stopped out, we could be heading towards much lower levels, or even into bear market territory, which would make this a moot point.

Most important is the execution of your actual sell stop. I have touched on this before, but it bears repeating.

If one of your fund holdings comes off its high by say -7.10%, don’t sell right away. Make sure that your 7% level gets clearly pierced. Since you are working within the trading limitations of a 403B account, this is more important here compared to an unrestricted account. You may give up a little more to the downside, but may avoid a whipsaw signal.

To me, that means that for the restricted trading accounts I manage, such as 401ks, I will wait with the actual execution of a sell stop until I see a level of worse than -7.50%. That gives me a little extra leeway in case of a market turnaround.

Again, this is not an exact science, and you need to use a little common sense. Keep the ultimate goal in mind, which is to limit any losses so that you don’t succumb to bear market forces.

The Rating Game Scam

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Long time readers continue to ask why I no longer feature muni bond funds in the StatSheet and what I think about munis in general.

While we’ve owned some muni funds back in 2006/07, I no longer support them in view of the busted real estate and credit bubble. It’s no secret that states, counties, cities and municipalities suffer from severe budget deficits, which will only get worse.

Mish at Global Economics had some words to say about this topic recently. Here are some highlights:

States In Serious Trouble

In the United States, a fiscal crisis is hitting states like Arizona, Illinois, Kentucky, California, Virginia, and Illinois. California has a whopping 56% deficit as a percent of its General Fund Budget according to the Center on Budget and Policy Priorities.

California Cash Crunch

Yahoo!News is reporting California debt rating cut as cash crunch looms.

California’s main debt rating was cut on Wednesday by Standard & Poor’s, which said the government of the most populous U.S. state could nearly run out of cash in March — and another rating cut might follow.

“The big question is, is there any fear they will get downgraded out of investment grade (so) you may have to sell … that’s where I think it would get interesting or hairy,” said Eaton Vance portfolio manager Evan Rourke.

S&P;’s downgrade was overdue because the state’s revenues have been so weak, said Dick Larkin, director of credit analysis at Herbert J. Sims Co Inc in Iselin, New Jersey. “Frankly I can’t understand why it took S&P; so long,” he said. “They could have made that decision back in September.”

Larkin said the three major rating agencies will hold off on more downgrades to California’s credit rating to avoid roiling the municipal debt market, even in the event budget talks between Schwarzenegger and lawmakers drag on.

“They’ll give the state an awful lot of rope,” Larkin said. “For a state to go below investment grade would cast a pall on every state and local issuer out there.”

Rating Game Scam

There is little doubt California should be rated as junk already. Dick Larkin notes they give the states a lot of rope and wonders: “Frankly I can’t understood why it took S&P; so long.”

What takes so long is one of two things, perhaps both.

1. Sheer incompetence by Moody’s, Fitch,and the S&P;
2. The ratings model itself, encourages ridiculously optimistic ratings

The big three rating agencies get paid on the quantity of debt they rate not the quality of their ratings. The higher they rate, the more business they get. For more on the problem as well as what to do about it, please see Time To Break Up The Credit Rating Cartel.

The big three did not downgrade Enron until after it blew up, and held of on downgrades of GM, Ambac, MBIA and others with share prices hovering just above zero.

Until the model changes, we will continue to see this kind of corruption and incompetence, for the simple reason the model is designed to reward corruption and incompetence.

Thus, California will not get downgraded to junk no matter what California does, short of default. None of the big three will risk roiling the municipal debt market because it would hurt their own profits to do so.

California is not the only state in serious fiscal trouble, although maybe one of the worst ones. In my view, the odds are increasing every day that some debt will have to be defaulted on or will at least get another downgrade as time goes on, despite the rating scam as discussed in the article.

None of this will bode well for muni bond holders and personally, I just as soon not take the chance of having any exposure in that area.

Sunday Musings: The True Picture

Ulli Uncategorized Contact

Mark Hulbert wrote and interesting story called “Lost and Found.” Here are some highlights:

The “lost” decade?

Maybe so.

But, if so, this is not the first time over the last two centuries in which a decade has been lost. And on each of those prior occasions, the stock market “found” itself soon thereafter.

am not the first commentator to discuss the depressing fact that, over the decade ending Dec. 31, the S&P; 500 index produced a loss. Even with dividends added back in, the index lost 15%, or 1.6% on an annualized basis.

But few of those commentators have noted that, depressing as the picture is that is painted by these statistics, the true picture is even worse. That’s because, over the last decade, the Consumer Price index rose by more than 28% — equal to about 2.5% annualized.

This means that at investor who put a lump in a stock index fund at the beginning of 2000, and held it until the end of last year, lost ground at the rate of around 4% per year. What a shock to investors who blithely assumed that ten years were more than long enough to provide assurance that the stock market would outperform inflation.

But investors at the beginning of the decade should have known better. If they had carefully studied the historical record, they would have discovered a number of past ten-year periods in which the stock market produced a negative real return.

The most recent such period was the summer of 1982. According to an analysis I ran on data compiled by Yale Professor Robert Shiller, the stock market’s trailing real return that summer was minus 3.6% annualized. The other “lost” decades that suffered the largest inflation-adjusted losses include the one ending December 1974 (when the trailing ten-year real return was negative 2.7%), August 1939 (when the trailing return was negative 3.3%) and June 1921 (when it was negative 3.1%).

While there is some solace in knowing that the decade we’ve just suffered through is not unprecedented, the good news is that, in each past case since 1870 in which the market’s trailing ten-year return was negative, its inflation-adjusted return over the subsequent ten years was positive.

This has held true even during decades of high inflation, such as the 1970s. Consider an investor who put a lump sum into the stock market in late1974. He would have been well behind inflation during the latter part of that decade, of course, when the consumer price index was rising at double digit annual rates. But, for the full decade through the end of 1984, this investor would have had an inflation-adjusted total return of 5% annualized.

To be sure, there is no guarantee that the future will be like the past. It’s possible that the stock market could produce two negative real return decades in a row.

[Emphasis added]

I did not know these stats but found them noteworthy. On the other hand, as an investor, I would not want to wait to find out whether the dubious record of no two losing decades in a row will be repeated over the next ten years.

What killed this past decade were a total of some 3 years of bear markets, which simply overpowered the remaining bullish 7 year period. That supports my long-held view that, over the long term, it is far more important to control downside risk than participate in every bullish period.

Investors never seem to grasp that concept in that they constantly try to find the latest and greatest ETF or mutual fund. Or worse, they align themselves with a well known name fund manager as if he could save their portfolio when a bear market strikes. 2008 has proven the fallacy of that type of allegiance.

Viewing the current economic landscape, I find it doubtful that there will be not at least one severe bear market rearing its ugly face over the next ten years. I personally am aligned with those who believe that the “w” concept (moving in and out of recessions) is virtually a guarantee.

Make your plans accordingly. Do not ever assume that you can make an investment and hold it through thick and thin—the market will teach you an expensive lesson.

Following trends and using sell stops is the only way I know of to avoid a portfolio massacre. Despite this losing decade, many have not learned that lesson and are doomed to repeat history.