I read a great interview, better referred to as a muscle flexing contest, between some of the titans of the mutual fund industry. In one corner, we have John Bogle, founder of the Vanguard Group and pioneer of index fund investing.

In the other corner sits Jeremy Siegel, professor and author, who has reinvented indexing with his company, Wisdom Tree, which indexes funds according to earnings or dividends rather than market capitalization.

“The great debate over index funds” illustrates heated arguments from both sides supporting their view. Even though it’s a written interview, you can detect the cold undertones and total disagreement about their respective investment approaches.

I am a pragmatic person and like to apply some numbers to these arguments as to which type of indexing, if any, works better. Let’s look at a comparison of these 2 views during a time when the dangers were greatest to your portfolio—the last bear market.

For this scenario, I wanted to find out how a plain index, such as the S&P; 500, had performed compared to a high dividend paying instrument, such as a Closed End Equity Income fund (ZTR). Here’s what I found:

ZTR in 2001: +18.74%
ZTR in 2002: -13.92%
Total over 2 years: +4.82%

S&P; 500 in 2001: -11.89%
S&P; 500 in 2002: -22.10%
Total over 2 years: -33.99%

Judge for yourself which one came out ahead.

While I am not a proponent of indexing, because of the severe bear market problems, I am in favor of using inexpensive index funds/ETFs. To me, the better way would be to combine index funds with trend tracking to avoid the above problems.

However, judging by the firmness of the debate in the article, I doubt that either of the gentlemen would be open to any other suggestions.

Is there such a thing as a free lunch? Wells Fargo seems to think so with its recent offering of 100 free trades a year, for stocks, ETFs and no load mutual funds.

Before you rush out and transfer your account, take a look at some of the pros and cons. The article “Take Advantage of Free Trades,” brought up some important trade offs you should be aware of.

First, you have to qualify by having $25k in a Wells Fargo account or a loan balance, which can include 10% of your mortgage. Second, as a long term investor, you may at times keep money in money market, waiting for an opportunity to invest. Wells pays only 1% interest on cash as opposed to most discount broker’s 4.5%+.

Most important, as the article points out, is the lack of speed and reliability when it comes to executing orders during times of market turmoil. As a comparison, apparently E-Trade’s web site remained very fast during the last pullback while others slowed down quite a bit.

That to me is a no-no and reminds me of investing in a low daily volume ETF. Remember, the exit doors can get crowed when the markets head south, and you want to be able to get out quickly and without too much slippage in price.

Got an e-mail from newsletter reader JP a few days ago regarding the proper use of sell stops as it pertains to my trend tracking methodology. While this topic has been discussed before in my Reader Q & A section on 2/2/2007, it nevertheless is an important point which bears repeating. Here’s what JP ran into when the markets tanked during May/June 2006:

“My question is regarding an international small company fund which responds well to your timing signal for domestic funds. Since this fund is in a 401K Principal Separate account, it does not have a symbol. I have downloaded 5 years data into excel spreadsheet and plotted a chart with 195 days sma (Simple Moving Average).

Once you are stopped out, how do you decide or what criteria do you use to re-enter?”

There are a few things to address.

First, the fund you are referring to is of an ‘international’ orientation and you are using my domestic TTI (Trend Tracking Index) to make the sell decision; you need to use the international TTI.

Second, you should base your sell decisions on 2 things. If the international TTI drops below its own long-term trend line, that is the time to get out or 2. If the price of your fund drops 7% or more off its high that is a sell as well. Whichever condition (1 or 2) happens first, that is your trigger point.

If condition 2 happens, and the market subsequently turns around and rallies again, we will have been caught in a whipsaw. At that point, we are in no man’s land, have to re-group and find a new entry point. That is the price we have to pay occasionally to be able to avoid the big down turns and watching your portfolio go down the drain.

In your situation, I would have waited to re-enter until the fund has made a new high and taken that as a validation that the long-term uptrend has resumed.

A few days ago, I read a short piece in the WSJ about the benefits of ETF investing. No news there; but the story went on to say that many investors who follow analysts’ “Buy” ratings could be in for a surprise.

While my preference is the use of momentum figures, regardless of what anyone else thinks or says, making your investment decisions strictly by following analysts “Buys” could have an opposite effect.

If an ETF, or any other security for that matter, has an excessive number of “Buy” ratings, it could very well mean that most of the buying has already been done and the upward momentum could reverse causing you to buy at the high.

Just be aware that when everyone screams “buy”, especially the analysts, the market top is close at hand.

The Dow made new highs this week, and the dollar hit 26-year lows. What a combination! Without getting involved in the futures market, you can still participate in a rising Euro/declining Dollar scenario.



The chart shows FXE, an ETF that tracks the price of the Euro currency. It pays a 2.32% dividend and last year returned slightly over 13%. It’s only been around for some 16 months but it has been very stable during times of market turmoil (May/June 06). The worst DrawDown over the past 15 months (MaxDD%) was a very small -3.27%, which occurred on 7/18/2006.

One of the reasons for that stability is that once currencies enter into a trend, they tend to stay in it for a long time—sometimes many years. While the momentum figures are all positive, you still need to protect yourself with an exit strategy should this market reverse. I recommend using a 10% trailing stop loss point.

I (or my clients) currently have no positions in FXE, but I might consider some exposure. If I do, it won’t be more than 5% of portfolio value.

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

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

Extremely bullish sentiment caused by good earnings news pushed all major indexes to new lifetime or multi-year highs.

Our Trend Tracking Index (TTI) for domestic funds rallied higher and now sits +5.32% above its long-term trend line (red) as the chart below shows:

The international index made new highs as well and has now moved to +9.42% above its own trend line, as you can see below:

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

Double click on the charts to see an enlarged image.