ETFs are not for everybody. I remember an experience from last year when I set up a retired client’s portfolio with several ETF positions along with no load mutual funds.

Even though his holdings were in accordance with our long-term investment approach via trend tacking, the client couldn’t help but watch the minute-by-minute ETF price changes on his favorite financial site—every day. He simply couldn’t control himself and finally asked me to sell the ETFs and replace them with equivalent no load funds.

I was reminded of this when I read a story on the Motley Fool website what Warren Buffett thinks about ETFs. Seems like he has some concerns in that most people may tend to become traders rather than remain investors with a long-term goal in mind.

Additionally, he fears that investors may face pressure from their brokers, who benefit from any kind of trading activity.

The bottom line is that ETFs are a great tool and here to stay, however, they still need to be used appropriately so that they can peacefully co-exist with your long-term goals.

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

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

Another notch in the bedpost for the bulls.

Our Trend Tracking Index (TTI) for domestic funds/ETFs now sits +5.57% above its long-term trend line (red) as the chart below shows:



The international index has now moved to +10.03% above its own trend line, as you can see below:

I came across another article (thanks to reader Nitin) in the NYT called “In Investing, Passive Beats Active.”

It’s the same old story, which makes the case for lower cost index funds beating actively managed mutual funds—most of the time. Sure, all things being equal, if I were a Buy-and-Hold investor, it would make sense to use a less expensive ETF over a more costly no load fund. If performance is very close, the lesser expensive vehicle would come out ahead over time.

However, as I said before, articles like this can create a false sense of security, in that an investor only looks at bull market performance and doesn’t realize that both vehicles will go down sharply in a bear market.

To give you a different perspective, and to add a dose of reality, I have included some of my actual Trend Tracking data for the past 6.5 years. The period covers our Buy and Sells from 10/13/2000 to 3/30/2007. However, I am obliged to state that past performance is no guarantee of future results.

Here’s the performance for the above 6.5 year period:

S & P 500: +3.41%
FDGRX: -12.53%

I used the widely held FDGRX fund as an example. You can plug in any fund you wish and see what answer you come up with. The data used for FDGRX were the adjusted closing prices as listed in Yahoo Finance.

This result obviously supports those in favor of index investing.

Next, I was curious to see if the extremely meager S&P; 500 Buy and Hold results could be improved, if an investor using this index would have invested using my Buy and Sell points for the same period. Here’s my actual Buy/Sell matrix:



I inserted the S&P; 500 figures and came up with a gain of almost 41%. In my advisor practice, we followed these Buys and Sells with actively managed no load mutual funds and the result was a gain of +53%. In this case, indexing lost out.

There you have it. If you’re using Buy & Hold, over time, including a bear market, you’ll be ahead using index funds as my example shows.

If you’re following trends, actively managed mutual funds (or a combination with indexes) appear to be the better solution based on the above data.

If you decide to play with this and insert your fund holdings, please share your results with me.

The short answer is: To some degree and in certain cases. Why bring it up?

A client e-mailed me this past weekend because he noticed a phenomenon on the domestic Trend Tracking chart (TTI). Since he is very much interested in technical analysis he observed that, a few weeks ago, the TTI “gapped” to the upside. Could that have any significance on future market behavior?

What does he mean? Take a look at the weekly TTI chart below:

Notice the red arrow pointing at an area where the chart shows a gap. That was caused by the highest price of the previous week being lower than the lowest price of the following week thereby creating a gap. Here’s a section of the chart detailing what I mean:

If you look at this chart, or any chart for that matter, you’ll find upside breakaway gaps occurring on extremely bullish sentiment, where the markets simply open higher and never look back. The opposite is true on the downside, where a breakaway gap identifies extreme weakness.

Having looked at thousands of charts over the past 25 years, I have to concur with what technical analysts are saying: Breakaway gaps will always be closed. That means that prices will eventually come back down to “close” the gap.

This is not a timing indicator, because you don’t know when it will occur, but it will happen. Prices may decline to a point slightly below the beginning of the gap (and rebound), or go past it.

While this is an interesting phenomenon, it has no effect on my decision making process. However, when the markets retreat, this point may very well coincide with some of my trailing stop losses.

Knowing that this occurs with regularity, let’s re-visit the above TTI chart in the future to see if the theory of the closing of the gap can be confirmed.

I just read an article in the WSJ called “Exchange Traded Funds appear in 401(k)s.”Some providers like WisdomTree Investments are rolling out funds invested in ETFs.

Keep in mind that these offerings are still in an infant stage and improvements should materialize once this market matures. This story alerts you to some of the pros and cons and also reinforces what I have been saying before: Many of the 500 ETFs are focused on small and narrow market segments and are, in many cases, more of a gamble than a long-term investment.

A few days ago, I posted about the tremendous increase in assets ETFs experienced over the past few years.