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.

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

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

Hugging the unchanged line was the mantra of the week, as the 1,100 level of the S&P; 500 still provided fierce resistance.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +6.80% 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 +10.69%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

In a follow up to yesterday’s post, reader Mark had this to say:

When you use ultra funds or ETFs, what % trailing stop loss do you use to reduce the inevitable whipsaws? 12%, 14% or do you just stick with 7% despite the whipsaws?

For me, it’s not much of a problem since I don’t use ultra funds at all in my advisory business. The volatility is simply too high for investors with a moderate risk tolerance, which is the category many fall into.

Sure, you can use the 7% rule, but chances are that you get stopped out quickly. If you are very aggressive, you can double the trailing sell stop to 14%.

Personally, as have posted about before, some of these ultra funds did not always live up their expectations in terms of accomplishing their stated performance objective. Some have underperformed, which means that you took on more risk without the corresponding potential reward.

I think that these types of leveraged ETFs satisfy the gambling instinct some investors possess. As more of these products are being introduced with 3 times and 4 times leverage, or even more, it makes it difficult to apply simple trend tracking rules. Instead, they’re promoting nothing but a casino like atmosphere.

It’s been almost a month that the S&P; 500 has hovered around the 1,100 mark, which has become a major point of resistance. Any attempts to clearly pierce through this level have been rebuffed so far.

This resistance has coincided with our Domestic Trend Tracking Index (TTI) finally closing its gaps as I alluded to in “How High Can We Go?”

Here’s an updated chart of the TTI:



As you can see, the exhaustion gaps, indentified by the large red arrows on the left, have been closed. This means the rebound in prices, since the lows in March 09, has passed the starting point of the first gap just above the upper red arrow.

Technically speaking, this could mean that major trend reversal is in the making. While these patterns are not always a reliable timing indicator, they have increased the odds that directional changes are a distinct possibility.

Recent market activity has confirmed the difficulty of the major averages to clearly pierce these levels. Should upward momentum resume, and this current glass ceiling gets shattered, we may be off to the races again with higher prices ahead.

Right now, I would not hold my breath for that to happen given how far the market has come and the still weak economic fundamentals. I am watching all sell stops closely and will execute them as they get triggered. I suggest you do the same.