MarketWatch had a story on Vanguard’s filing of a new ETF tracking the well known MSCI EAFE Index (Morgan Stanly Capital International Europe, Australia, Far East Index).

The buzz is that it will be a directly competing product with Barclay’s well known iShares MSCI EAFE fund better known as EFA. This ETF has been well liked by many investors, and it has grown in size to some $45 billion.

So what’s the big deal?

For one, as could be expected, Vanguard’s filing stated an annual “expected” expense ratio for the new ETF of only 0.15%. Compare that to iShares EFA of 0.35% and you can see that this has the potential of a real competitive battle.

That doesn’t mean that I will jump right in and buy it. As is my habit in my advisor practice, I’d like to see a few months of price data so that I can track the trend. Nevertheless, this new competing product, with less than 50% of the fees, is a great step in the right direction of benefiting the investing public.

Now, if only mutual fund companies would notice.

A couple of weeks ago, the WSJ featured another article comparing Index Funds and ETFs titled “A Close Race, a Surprising Finish.”

With the help of Morningstar, they crunched some ETF numbers all the way back to 1997 and looked at before and after-tax returns. The ‘before-tax’ analysis is shown in the table below (double click to enlarge):

During the last week, a few newsletter readers had questions about the use of sell stops as they pertain to my trend tracking methodology.

Here’s one e-mail:

I have some mutual funds that are in nose bleed territory, and I have mental sell stops which are about 6-8% below current price.

Also, you mentioned in one of your articles setting an upside and a downside sell point. Could you elaborate?

Let me clarify, since this is an important issue.

For domestic funds/ETFs, your trailing stop should be 7% below the “high price” the fund/ETF made “after” you bought it. You don’t compute it from the current price, unless you just purchased it.

Also, be sure to consider any fund distributions since they have an effect on your sell stop point. I’m not sure what you mean by your funds being in nose bleed territory; if you use the sell stop discipline, this will never happen.

When selecting funds, use the StatSheet as a guide and make your selections based on your risk tolerance. In other words, if you are conservative, don’t pick very volatile sector or country funds.

The upside sell on any of your funds would be the trailing stop loss (7%), which eventually will get you out of the market, provided you follow the signal. Or, if our TTI (Trend Tracking Index) gives a sell first (unlikely) then that would be the overriding factor.

The downside sell occurs if the market goes straight down after your purchase of a fund/ETF; the 7% sell stop will serve to limit your losses.

With the markets having been in a rally mode for the past 9 months, some of your no load fund/ETF holdings are most likely showing different gains. If you listen to some of the media, however, you should sell your laggards and load up on the winners.

While it’s certainly advisable during an uptrend to sell an underperformer (I have done that too by liquidating SWHEX), it is not smart to swap a large portion of your portfolio for the latest and greatest no load fund or ETF. While it may be tempting to play performance catch-up, this can be a two-edged sword. Just because your best friend was fortunate enough to pick better performers than you did last year, doesn’t mean that it is the right thing for you to do at this time.

Why?

For one, when the market turns, and it will, those top performers will be hardest hit and can turn your slowly accumulated gains into losses. Two: if the market defies all odds and continues its upward path, you may see some sector rotation due to the ever changing economy, which may cause some of your laggards to pick up some steam.

So, when is the time to make major adjustments? If you’re following my trend tracking approach, the best time is at the beginning of a Buy cycle. That’s when you need to determine your risk tolerance before you select the funds/ETFs to be invested in.

Remember, this is not a life or death decision in that you’re not holding these funds forever (as you might with Buy & Hold). Your plan should be to select those with a focus on an average Buy cycle duration, which historically has been some 14 months.

I have to say that in my advisor practice (with the benefit of hindsight) my selections last year were very much on the conservative side, and I have made some adjustments to account for stronger performing sectors. However, trying to revamp an entire portfolio at these lofty levels, by shifting into a more aggressive mode, would be a disservice to my clients and would definitely not be in their best long-term interests.

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

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

Sideways action had the major indexes slip slightly.

Our Trend Tracking Index (TTI) for domestic funds/ETFs now sits +4.85% above its long-term trend line (red) as the chart below shows:



The international index has now moved to +8.88% 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.

Last week, the U.S. Court of Appeals overturned a long-standing special exemption for brokers known as the “Merrill Rule,” which allowed broker-dealers from offering fee-based accounts without being registered as Investment Advisors.

The court found that the SEC had exceeded its authority by allowing such practice. At this point, the SEC announced that it will not fight the decision.

The lawsuit was brought by the Financial Planner’s Association (FPA), and it agued that “whereas commissioned brokers are only responsible for making sure that trading and related transactions are handled properly, advisers by law must make investment decisions based on what’s in the best long-term financial interests of their clients.”

This is a point I have repeatedly touched on over the years. Broker-dealers, or their sales people, do not necessarily have the client’s best interest in mind when they peddle preferred company products based on incentives.

I for one applaud the U.S. Court of Appeals for fighting the SEC on this one. The outcome has the potential to benefit all investors by making them aware of the differences in compensation and subsequently the bias of the advice.