From the Library of Gayle M. Noll The ETF Trend Following Playbook From the Library of Gayle M. Noll This page intentionally left blank From the Library of Gayle M. Noll The ETF Trend Following Playbook PROFITING FROM TRENDS IN BULL OR BEAR MARKETS WITH EXCHANGE TRADED FUNDS TOM LYDON From the Library of Gayle M.
Noll Vice President, Publisher: Tim Moore Cover Designer: Alan Clements Associate Publisher and Director Managing Editor: Kristy Hart of Marketing: Amy Neidlinger Project Editor: Anne Goebel Executive Editor: Jim Boyd Copy Editor: Krista Hansing Editorial ditorial Assistant: Myesha Graham Services, Inc. Operations Manager: Gina Kanouse Proofreader: Apostrophe Editing Services Senior Marketing Manager: Julie Phifer Indexer: Lisa Stumpf Publicity Manager: Laura Czaja Compositor: Jake McFarland Assistant Marketing Manager: Megan Colvin Manufacturing Buyer: Dan Uhrig © 2010 by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publish- er is engaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique.
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Library of Congress Cataloging-in-Publication Data Lydon, Tom, 1960- The ETF trend following playbook : profiting from trends in bull or bear markets with exchange traded funds / Tom Lydon. Includes bibliographical references. ISBN-13: 978-0-13-702901-3 (hardback : alk. Exchange traded funds.
Stock index futures.63'27--dc22 2009022712 From the Library of Gayle M. Noll Thanks to Mom and Dad; my wife, Lisa Ann; our kids, Creagan, Cameron, and Anya; and Lily, our dog, for their love and support From the Library of Gayle M. Noll This page intentionally left blank From the Library of Gayle M. Noll Table of Contents Acknowledgments .xii About the Author .xiv Introduction: Buy–and–Hold: Rest in Peace .xv Chapter 1 Trends Are an Investor’s Best Friend .1 Buy-and-Hold’s Funeral March .4 Getting in Touch with Your Emotions .7 Never-Ending Opportunities .9 Chapter 2 Risk and Disaster Don’t Have to Go Hand-in-Hand .11 Greed and Fear and Stocks, Oh My! .13 What Kind of Risk Level Can You Tolerate? .14 Types of Risk .17 Is Time on Your Side? .17 The Go-Getter (Aggressive) .17 The In-Betweener (Somewhat Less Aggressive) .18 The Almost There (Moderately Conservative) .18 The I’m Outta Here (Conservative) .18 Chapter 3 Spotting Trends .23 Tools of the Trade .23 Learning to Identify Trends .24 From the Library of Gayle M.
Noll THE ETF TREND FOLLOWING PLAYBOOK The Rules of the Game .25 Understanding the Moving Average .26 Exiting Safely and Profitably .27 Avoiding a Bursting Bubble .29 Learning to Live with “the Sell” .29 Finding the Trends .30 Up, Down, and Flat as a Pancake .31 Timing Is Everything .35 Chapter 4 Why Trend Following Can’t Be Beat .39 Never Look Back .42 What Happens After You Sell? .43 Conquer Volatility, Don’t Let It Conquer You .44 Do You Have Any Better Ideas? .44 Buy-and-Hold: Does It Work Like It Should? .45 Where That Leaves Us .46 Chapter 5 The Nuts and Bolts of ETFs .49 Why ETFs Are a Better Solution .50 A Fast-Growing Industry .56 Chapter 6 Tools You Can Use .62 Looking Under the Hood .64 viii From the Library of Gayle M. Noll CONTENTS Chapter 7 Navigating U.66 Dow Jones Industrial Average .69 Russell Mid-Cap Index .70 Growth Versus Value .72 Value: Slower but Steadier .72 Trends in Value and Growth .73 Domestic Market ETFs .74 Digging in Even Deeper .75 Chapter 8 International Opportunities .77 The Land of the Rising Sun.79 The Beginning of the End .84 Investing in Emerging Economies .86 Another BRIC in the Wall .90 Chapter 9 The Best-Looking Sector in the Room .93 Technology: High Highs and Lower Lows .95 The Bubble Springs a Leak .96 Passing Around Blame .98 One Big Financial Mess .99 ix From the Library of Gayle M. Noll THE ETF TREND FOLLOWING PLAYBOOK The Beginning of the Global Crisis .100 Sector-Specific ETFs .101 Power Up with Utility ETFs .103 Checking Up on Healthcare ETFs .104 Banking on Financials .104 Chapter 10 The Luster of Gold and Crude .107 Oil: A Slippery, Yet Profitable Slope .110 Turning Trends into Profits .113 Owning Your Share of Commodities .118 Broad-Based Commodity ETFs .119 Going the Roundabout Way .121 Commodities: A Valuable Part of Your Portfolio 122 Chapter 11 The World of Currencies .123 Monitoring the Ups and Downs of Money .123 A Rocky Road for the U.124 The Dollar Bucks Its Trend—Will It Last? .126 Making the Most Out of Currency ETFs .129 Squeezing the Most from Your Dollars .131 x From the Library of Gayle M. Noll CONTENTS Chapter 12 Trends in Fixed Income .133 Factors to Consider .137 The Yield Curve .139 Recent Trends Spotted .141 Taxes and Municipal Bond Trends .142 High-Yield Opportunity .144 Fixed-Income ETFs .144 Who Wants Bonds? .146 How to Choose Bond ETFs .147 Chapter 13 Getting Leverage in the Markets .149 The Long and Short of ETFs .150 Pumping Up Returns .154 Chapter 14 Conclusion: Let’s Get to Work .159 Switching from Mutual Funds to ETFs .161 Working with Your Advisor .165 References and Resources .199 xi From the Library of Gayle M.
Noll Acknowledgments I’d like to thank the numerous people who generously gave us their time and shared their thoughts about ETFs, including the many read- ers of ETFTrends.com and fellow investment advisors, whose ideas, feedback, and opinions are what made this book possible. I’d especial- ly like to thank the ETF Trends readers who shared their thoughts on investing with us, including William Doherty, Bill Fritz, Hamish Gunn, Bryant Hayward, Roger Hing, Rick Holbrook, and Ted Spickler. Thank you to all of our ETF industry friends, fellow bloggers, and personal friends, including Larry Connell, Gary Gordon, Bob Grayson, Ted Kennedy, Phil Pegram, Bob Pisani, and Peter Tolk. Thanks to the team at Jennifer Connelly Public Relations: Jennifer Connelly, Melinda Staab, and Carol Graumann.
Thanks also to Darlene March at March Media Relations. Thanks to Werner Keller, Chip Norton, and Steven Vames for sharing their valuable expertise and knowledge with us to make this a better, more informative book for our readers. Thank you to John Bishop, who shared his experience and thoughts with us and gave an honest, page-by-page critique of the book. Thank you to Max Chen, Kevin Grewal, and Tisha Guerrero for shar- ing their talent for writing and helping make ETF Trends a better web site.
Thanks to all the ETF Trends advertisers who keep the site going and growing. I’d like to thank Jim Boyd, Anne Goebel, Kristy Hart, and Julie Phifer xii From the Library of Gayle M. Noll ACKNOWLEDGMENTS at FT Press for taking us on once again and guiding us. Thanks to Virginia Zart and Melody Harris for their day-to-day sup- port and for putting up with me.
A special thank you to Karen Riccio for leading this project. Another special thank you to Heather Hayes for seeing this through to comple- tion with the same care she used in our first book. Finally, thanks to Mom and Dad and to my wife, Lisa Ann; our kids, Creagan, Cameron, and Anya; and Lily (our dog), for their love and support. xiii From the Library of Gayle M.
Noll About the Author Tom Lydon is the proprietor of ETF Trends, a web site with daily news and commentary about the fast-changing trends in the exchange traded fund (ETF) industry. Lydon is also president of Global Trends Investments, an investment advisory firm specializing in the creation of customized portfolios for high-net-worth individuals. He has been involved in money management for more than 25 years. Lydon began his career with Fidelity Investments and was a founding member of Charles Schwab’s Institutional Advisory Board.
He also serves on the board of directors for U. Global Investors, Inc.; Security Global Investors/Rydex Investments; and the Pacific Investment Management Co., LLC (PIMCO), Advisory Board for Registered Investment Advisors. Lydon is a regular contributor to major print, radio, and television media and has been invited to speak to audiences at financial conferences around the world. Lydon is the author of iMoney: Profitable Exchange-Traded Fund Strategies for Every Investor.
xiv From the Library of Gayle M. Noll Introduction BUY–AND–HOLD: REST IN PEACE For decades, the vast majority of us have enjoyed opportunities to improve our personal economic situations. Appreciation in our home, a steady job, growing industry, and continual rises in the stock market are sometimes taken for granted. But the things investors were once able to bank upon are no longer there.
Buying and holding stocks can no longer be counted upon as sure things for success. Our current century hasn’t started off so well, and you and mil- lions of others are being forced to rethink your investment strategies to survive. The markets certainly saw their fair share of volatility before now, but this is different. Times have changed.
For much of modern investing history, you and countless other investors have heard that buy-and-hold was the way to go. Experts have assured us that, no matter what happens in the markets, they always trend up over time. If you could just hang on and ride it out, you would be duly rewarded with a handsome retirement fund. But during the last half of the 2000s, you and millions of others have lived through events rarely seen in history.
The nation’s largest financial institutions were felled by both a lack of accountability and a lack of transparency. It was an economic crisis for the history books, likely to be dissected and analyzed for years to come. In the end, if you were among those who held on for dear life, believing that buy-and-hold would prevail, you wound up losing big. Your plans for a comfortable retirement are now dashed.
Accountability and transparency seem nonexistent. The net result is that you and others have not only lost big bucks—you have probably also lost faith. xv From the Library of Gayle M. Noll THE ETF TREND FOLLOWING PLAYBOOK What eventually became known as the United States’ “Lost Decade” began well enough when markets hit highs in March 2000.
But it wasn’t meant to last. For the next few years, a large, unruly bear came in and tore the house down. Technology and the bursting Internet bubble led the big decline, ultimately taking down the NASDAQ Composite (generally referred to as “the NASDAQ” throughout this book) and S&P 500 by 75% and 45%, respectively. A brief honeymoon lifted the markets from 2003 to 2006, giving investors a reason to believe once again—but along came 2007 and the kickoff of a new bear.
This one was the bear of nightmares, some might say. At the end of 2008, the NASDAQ closed down a dismal 41%. The S&P 500 fell 39%—and continued to lose into 2009. There’s always a bogeyman in these markets, right?