|
What Are They
ETFs are baskets of securities that are traded,
like individual stocks, and currently all trade on the American Stock
Exchange. Unlike regular open-end mutual funds, ETFs can be bought and
sold intra-day (throughout the trading day). More similar to stocks in
some respects they can
also be sold short and bought on margin. Unlike mutual funds which can be
bought and sold with no transaction fees one pays a commission to trade ETF's (e.g., $7 for Scottrade).
ETF's are usually more tax efficient, then normal mutual funds. and possess
lower annual expanses then even the least costly index mutual funds.
ETFs are essentially passively managed funds
(unlike mutual funds that are "actively" managed), that allow investors to trade a portfolio of
securities in a single transaction. They offer investors efficient trading of
style-specific index, sector, and/or international exposure. The
index funds in particular replicate such indexes such as the S&P, Russell,
Dow Jones and various international indexes. The specific investment style
of an ETF can represent a specific sector or industry such as technology, a
broad market index such as the S&P 500, or an international region or specific
country such as Brazil or France. In addition, various funds may focus on
differing investment styles such as value or growth
How They
Work
Although ETFs are more flexible than mutual funds
can be traded on an exchange throughout the day, but unlike regular
mutual funds, ETFs do not necessarily trade at the net asset values of their
underlying holdings. Instead, the market price of an ETF is determined by forces
of supply and demand for the ETF shares which in turn are driven by the
underlying values of their portfolios. ETFs can trade at prices above or
below the value of their underlying portfolios.
Advantages
Disadvantages
 |
Liquidity - Some ETF's are thinly traded with low
trading volumes, thus settlement prices can be of concern.
|
|
Bid/ask spread issues: Can be of concern in
volatile and thinly traded issues because of the way ETFs are
structured. Sometimes ETFs are bought at a premium to
the portfolio's value and/or sold at a discount.
|
| Transaction costs - treated like
stocks with brokerage fees assessed |
| Sometimes poor at tracking the
underlying portfolio or markets they are based upon.
|
Further
Education
The American Stock Exchange which list over 100
ETF's provides some good information on ETFs including the advantages and
risks of trading them. Link here:
American Stock Exchange ETFs
and select
"ETFs" from the menu on the upper right.
Yahoo Finance also has a very informative site on
ETF's with all kinds of information and news. Link here:
Yahoo ETF's
How It Works
The Fund-Track ETF Tracking system ranks 74 ETF's which
includes almost all Barclays iShares, and four of the most highly traded ETF's:
QQQ (the Nasdaq-100 Index Tracking Stock), SPY (the S&P 500 Index Tracking
Stock), DIA (the Dow Jones Industrial Average Index Tracking Stock), and FFF
(the Fortune 100 Index tracking stock). As seen in the PDF list below the
it contains a broad array of investment options from various countries and
international regions (20 International funds), all major asset styles,(25 index
funds) and all major industrial sectors(29 Sector funds). For detailed information on iShares
go to Barclay's site here: iShares.com
The following PDF files lists all 74 ETFs tracked by Fund-Track:
Fund-Track ETFs by
Fund-Type -- PDF
The ETF Fund-Track rank works similar to the
Fund-Track mutual fund ranks and the Fund-Track Fidelity Select rank but
calculates price strength slightly differently to match the underlying volatility
of this investment class.
The following is an example rank of the Fund-Track
ETF system :
Example ETF Fund-Track Rank
- PDF
How To Use
(Recommended
Trading Methods)
ETF's exhibit an ability to move up and down the ranks rather quickly
at times somewhat like to the Fidelity Select funds. Their average volatility
is also somewhat similar to the Fidelity Select funds. Model portfolio
results should be realistic in that they can be followed with end of day pricing
trades. ETF funds like
stocks can be traded intra day and have no settlement delays unlike mutual
funds.
Since there are no redemption penalties to worry about nor fears of
expulsion from fund families, trading thresholds were set tighter with these
funds. The top 10 (top 13.5%) was used as the trading threshold.
Like the regular Fund-Track model portfolios they uses a
bi-weekly review and upgrading approach (Tuesdays and Fridays). The
Multi-fund model portfolio holds 3 funds at a time.
The upgrading rules used for both Model portfolios
are:
Both a single fund and multi-fund model portfolio
approach were tested for 2003, and the returns for their can be
seen in the Performance section below.
Testing
Notes:
A similar test using just weekly
(Fridays) review and upgrades was completed and the results were somewhat similar in returns
but
with obviously less trades. With its broad array of options there exists
many possibilities for utilizing this rank for trading. (e.g., limiting
trading to just the International ETF’s in and by themselves avoiding dissimilar funds). Testing and analysis is ongoing concerning trading approaches
that can be used with this rank.
For the updated Model portfolios for 2004 see the ETF Page in the
Fund-Track Members area (members only) or on
the Monthly Update Page.
How To Get
Started
Refer to the "Fund-Track
Basics" section on the How To Use Page for tips on how to get stated
using the this system (somewhat the same principals for using the other
Fund-Track systems). The steps outlined there apply to this ranking
system as well. In summary, these steps are:
-
Review the
past history of this system (Performance section) and/or "paper
trade" it for a while.
-
If you haven't already, open a brokerage account where
you can trade ETF's (most any brokerage)
-
Decide upon a Fund-Track investment approach.
(single or multi-fund, trading thresholds, frequency of reviews,
etc.)
-
Become a Fund-Track
Member. ( in order to up-to-date ranks for the ETF's)
-
Purchase your funds
- Select the top Funds on the most current rank for purchase
consideration. If you plan to follow a model portfolio:
| Single Fund Model portfolio
- Buy if the one fund it is holding is at or very near
the top of the rank OR wait until it either
moves back to the top to buy or until it drops in the rank
enough to trigger an upgrade and buy the fund that is upgraded into (i.e. the highest ranked fund).
|
|
Multi-fund portfolio -
Buy any fund in it that is in the top 3. If for example the
funds in the model portfolio were ranked 1, 5, 9, then you would just
buy the top ranked fund and wait until the other 2 either get
upgraded (drop below the top 10) or move back up to the top 3
and then buy. Eventually you will soon be in the
same funds as that of the model portfolio.
|
-
Review Fund-Track Regularly - The Fund-Track
ETF rank is updated on Tuesdays and Fridays after the market
closes.
Model portfolios were created to track the
success or failure of the ETF Fund-Track to identify superior sectors at
any time under any market conditions. This ability to maintain a successful
mutual fund timing system is gauged by the return of the model portfolios.
They
utilizes the mechanical trading rules in the recommended "How To Use " section
above. For a further explanation of performance see the Fund-Track
Performance page. The ETF model
portfolios were initiated at the beginning of 2003 with $10,000 and are
hypothetical (i.e. they are not actually traded) In reality prices will
slightly vary from the close of a day in which a trade was triggered to the open
of the following day.
2005
Performance
|
ETF Single Fund Model
Portfolio |
5.7% |
|
ETF Multi-Fund
Model Portfolio |
4.7% |
|
Nasdaq |
1.4% |
|
S&P Composite |
3.0% |
|
DJIA |
- 0.6% |
ETF Funds
by Fund Category 2005 -- PDF
As seen in the first report above the returns for all Fund-Track ETF
funds for 2005. The top fund for the year was the
South Korea fund which was up almost 53% for the year.
Country specific
international funds composed the top 4 places for the year. The best
returning sector fund was the iShares Dow Jones US Energy returning over
33%. The worst
performing sector was the value style index funds
Model Portfolio Review
ETF Fund-Track Single Fund Model Portfolio 2005 - PDF
(page down to bottom)
ETF Fund-Track Multi-Fund Model Portfolio 2005 - PDF
(page down to bottom)
As seen in the box
above and on the PDF reports the multi-fund model portfolio out performed the
single fund considerably. The continued choppy market conditions during the year favored a
more spread out approach rather than a focused one. The Multi-fund
portfolio holds 3 funds and executed 40 trades over the quarter (average turnover
of 13 trades for the year for each one fund holding). It returned 15.6%.
The more focused single fund model portfolio returned 8.0% for the year over
15 completed trades (thus 16% more turnover the multi-fund
approach)
|
|
2004
|
|
ETF Single Fund Model
Portfolio |
8.0% |
|
ETF Multi-Fund
Model Portfolio |
15.6% |
|
Nasdaq |
8.6% |
|
S&P Composite |
9.1% |
|
DJIA |
3.0% |
ETF Funds
by Fund Category Avg Return, 2004 -- PDF
As seen in the first report above the returns for all Fund-Track ETF
funds for 2004. The top fund for the year was the
Austria fund which was up over 74% for the year. Country specific
international funds composed all the top 5 places for the year. The best
returning sector fund was the Cohen & Steers Real Estate fund returning over
32%. The best style index fund was the Russell Midcap Value Index
with a return of over 22%. The worst
performer was a technology sector fund, the Goldman Sachs Semiconductor fund
which was down over 14%.
As seen in the second report above, the top fund
category for the year on an average basis were the international funds.
Specifically the South Africa Index Fund and the Latin American funds.
European funds also did well. The top overall sector was Real Estate
followed by Natural Resources. The worst performing
category was the Technology sector which was up only 2.6% on average.
Model Portfolio Review
ETF Fund-Track Single Fund Model Portfolio 2004 - PDF
ETF Fund-Track Multi-Fund Model Portfolio 2004 - PDF
As seen in the box
above and on the PDF reports the multi-fund model portfolio out performed the
single fund considerably. The continued choppy market conditions during the year favored a
more spread out approach rather than a focused one. The Multi-fund
portfolio holds 3 funds and executed 40 trades over the quarter (average turnover
of 13 trades for the year for each one fund holding). It returned 15.6%.
The more focused single fund model portfolio returned 8.0% for the year over
15 completed trades (thus 16% more turnover the multi-fund
approach)
The ETF model portfolio was initiated in 2003 and
back tested to the start of that year. Its performances for 2004 - 2003 can be
seen in the following PDF files: The Multi-fund portfolio returned 33% in
2003 and 15.6% for 2004
while the single fund had a return of 21.8% for 2003 and 8.0% for 2004.
Fund-Track ETF
Multi-Fund Model Portfolio 2003 - 2005 -- PDF
For up to date views of performance go to the
Members ETF page
(membership required) or to the Monthly Update
page for a look back at the previous month's performance
Back To Top
|
