Actively managed ETFs seem to make the headlines now on a daily basis with more major players attempting to jump in the game. MarketWatch had this to say in “Pimco’s Active ETFs:”

Pimco has actively-managed mutual funds that seek to outperform a given index or benchmark by either having higher returns or by obtaining similar returns at lower risk. Now, Pimco has launched a series of exchange traded funds that are also actively-managed.

I was puttering around on the Pimco web site looking for more information and eventually I made my way to a fairly new Pimco site exclusively for its ETFs. In addition to these active ETFs, Pimco has seven index ETFs that are covered on the Pimco ETF web site.

MINT has been trading since mid November 09 while MUNI has been offered since the middle of December. The ETFs are still trying to establish themselves and have low trading volumes. MUNI sports an average daily volume of 5,000 shares, while MINT does much better with 18,000 shares.

Still, much more time is needed (about 9 months) to observe price action and track trends, before I am willing to add these newbies to my database so that they can be featured in the weekly StatSheet.

In regards to last Tuesday’s post “You Don’t Need A New High,” reader Fred was looking for more clarification:

Since you were on the subject of sell stops today, I have two questions related to it.

Also, at what point would you use, for example – an index (like the Wilshire 5000) moving below its 200 Day MA instead of a sell stop to get out of a position?

The first part of Fred’s question has been discussed many times. I use a 7% trailing sell stop for broadly diversified domestic and international equity funds/ETFs. For more volatile sector and county funds/ETFs, I recommend using 10%.

However, if you were to invest in the W5k via an ETF or a mutual fund, you would not use its own trend line to make a buy/sell decision, but you would use the direction of the domestic TTI.

For example, back on June 3, 2009 when the domestic Buy was generated, you could have taken a position in the W5k. The markets moved higher but corrected in July, but never moved below the TTI’s long-term trend line again. That means you would have held on to your position unless your 7% trailing sell stop would have been triggered.

Right now, with the TTI hovering above its long-term trend line by +6.11%, there is mathematically no chance that it will drop below it before the 7% sell stop on the W5k gets triggered.

The TTI is a slow moving indicator, which will always lag the price movements of individual equity funds/ETFs. In other words, the sell stop will be your dominating guide as to when to get out.

Forbes featured an interesting story by Nouriel Roubini titled “The Coming Sovereign Debt Crisis.” Here are some highlights:

In 2009, downgrades and debt auction failures in countries like the UK, Greece, Ireland and Spain were a stark reminder that unless advanced economies begin to put their fiscal houses in order, investors and rating agencies will likely turn from friends to foes. The severe recession, combined with a financial crisis during 2008-09, worsened the fiscal positions of developed countries due to stimulus spending, lower tax revenues and support to the financial sector.
…

[Emphasis added]

You can probably add a few South American countries, such as Venezuela, to the list of those facing sovereign risk pressures. While I agree that loose fiscal policies need to come to an end, I just don’t see it happen anytime soon.

The more likely consequence will be a financial blow up someplace in the world, which may unravel the current stock market rally. This has been my recurring theme for a long time not for the reason of me being negative, but simply being realistic.

We are living in an interconnected, changing world were no major catastrophic financial event remains localized. Everybody is connected with everybody else, and we are all affected by each other’s actions to varying degrees.

My point in these discussions is always the same. Don’t become complacent with your investments. Know your exit strategy and follow through executing your trailing sell stops whenever they are triggered.

I am reading “Actively managed ETFs pique interest of big fund companies:”

The actively managed exchange-traded-fund market is expected to explode as top mutual fund companies, including Putnam Investments, John Hancock Funds LLC, T. Rowe Price Group Inc. and Pacific Investment Management Co. LLC, consider entering the business or expand their lineups.

The company also has had discussions about launching an ETF version of its giant Total Return Fund, said Don Suskind, a vice president and head of the ETF product management team.

[Emphasis added]

It’s an interesting concept that some mutual funds may convert to ETFs. That confirms my long-held belief that if mutual fund companies don’t come off their high horse and offer lower fees along with less restrictive trading policies, their days may be numbered.

If actively managed ETFs can attract enough followers over time, and offer a wide variety of low cost products, which they will, there would be no reason to ever buy a mutual fund again.

I am following these developments closely, but will not add any of these types of ETFs to my data base until I see at least 9 months of price history along with acceptable average daily trading volume. To me, that number has to be at least $4 million before I even consider modest exposure—assuming, of course, that the trends support such a move.

Overall, these are positive developments for the individual investor and for trend tracking in general. Of course, I can hear the new battle cry, which no longer will be whether mutual funds are better than ETFs, but whether managed ETFs are better than indexed ETFs.

As always, these comparisons are downright silly because the author usually has an axe to grind. I have found in the past that at times mutual funds will outperform ETFs and vice versa.

It’s more important to use the most appropriate instrument when making an investment. Momentum figures, such as I publish in the weekly StatSheet, may make it easier for you to make that decision.

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

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

Disappointment over JP Morgan’s earnings pulled the major indexes into negative territory for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +6.11% 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 +9.28%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

Recently, I had an email exchange with a reader, who misunderstood the exact recommended sell stop figures and used 7.5% for broadly diversified equity mutual funds/ETFs and a range of 10-12% for sector and country ETFs.

There is nothing wrong with using a sell stop percentage that you are comfortable with, such as 7.5%. I know of advisory firms that use 8% straight across the board. All of these different percentages will do the intended job for you, which is to limit losses or to lock in profits once the trend comes to an end.

However, I want to caution against using a range, such as this reader did when applying his 10-12% rule. The reason is that it can lead to wishy-washy decision making.

Here’s what I mean. Say, an ETF has come off its high by -10%, so you decide to hang on and watch it a while longer. It then drops to -11% and you continue holding on; subsequently it slides to -12.5% and you decide to wait a little longer since this number is still fairly close to your maximum of -12%.

You can see where I am going with this. It’s very easy at this point to let emotions control your decision making process and, all of a sudden, you’re down to -14% and still have not sold.

Use a fixed number to determine your exit point, and not a range, which will help you avoid getting stuck with this kind of slippage.

Again, I give myself a little leeway once a sell stop has been triggered. For example, if my intended exit point was set at -7%, and my position closes at -7.15% or so, I will wait a day (sometimes two) to see if the market rebounds before pulling the trigger.

On the other hand, if market activity pushes my holding straight to -8% at the close, I will the sell the next day—no questions asked.

Again, this is not an exact science, but I believe that sticking to a firm number as discussed, will make it easier for you to execute any exit strategy as opposed to being stuck in a range.