The Traders Journal

Investment Editor Retires: Leaves Us with Four Lessons That Matter

Almost without exception, institutional money managers use Exchange Traded Funds (ETFs). My own trading routines call for reviewing the top 100 ETFs daily. This is a process that I encourage you to include in your own routines. Here’s how and why.

I maintain a personal ChartList of the top 100 ETFs and scan it virtually every day. My ETF ChartList was carefully assembled by using the ETF.com website and Morningstar’s ETF Investor newsletter edited by Samuel Lee.

Let me elaborate a bit here. My ETF ChartList is comprised of the top 100 ETFs based on my own equation. I weighted about 200 ETFs based on daily trading volume, expense ratios, tax cost ratios, total assets, relative performance over the past three years and the asset class they represent.
My winnowing procedure then produces a basket of candidates to which I frankly apply a significant subjective factor based on my experience. The result is a nicely balanced ChartList of the top 100 ETFs representing all the essential asset classes.

The reason this ChartList is so powerful is that it clearly shows me which asset classes the institutional investors are presently most interested in, as well as how they are actually putting their money to work.

When I see the institutional money flowing into perhaps a number of Large Growth Domestic Stock ETFs, I take a special interest. This provides the catalyst for revisiting a wider assortment of ETFs and stocks in this asset class. I don’t just immediately jump into one of the ETFs in my top 100 ChartList, although usually they remain first tier candidates.


No doubt one of your questions is how do I decide which ETFs in a particular asset class to include. Let me explain using, for example, the asset class of Large Growth Domestic Stocks. Morningstar’s Samuel Lee presents 11 ETFs in his Morningstar ETF Investor newsletter that he feels best represent this asset class. ETF.com presents 17 options, then grades and ranks these by specific attributes and even awards three of them “analyst pick” designations. I load these into my own weighted equation and voila! I come up with a few of my own winners which I then add into my ChartList to make certain that I have this asset class covered. (As a side note, my own weighted equation spits out the Guggenheim S&P 500 Pure Growth (RPG) as my top choice in this asset class).

Since this winnowing process is ongoing, the ChartList is seldom static and, as explained earlier, money flowing into certain ETFs is simply the catalyst for digging deeper.

For those of you who have downloaded my ChartPack, refer to the ChartList “105 ETF Master Watchlist”. Remember that updates are ongoing; therefore your version of the ChartList depends upon the date of your last download. For those of you who might be interested in adding this routine to your analysis, check out the Tensile Trading ChartPack at: http://store.stockcharts.com/collections/stockcharts-com-chartpacks/products/tensile-trading-chartpack-by-gatis-roze

Although this was a rather lengthy description of how I use ETFs, I thought it was an appropriate acknowledgment and shoutout to Samuel Lee, the departing editor of Morningstar’s ETF Investor publication. In the May 2015 publication, he announced that he was leaving and wrote a very interesting piece titled “What I’ve Learned”. I salute Samuel for his fine insights regarding ETF investing in these past years and wish him the best. His article also provided the impetus for this week’s blog. I would like to discuss what Mr. Lee considered to be his top four lessons. I would encourage readers to search out the full article as I have only limited space available here.

Lesson 1
Many, if not most, people are unable to admit being wrong about big and important beliefs
I’ll second that lesson and encourage readers to revisit over two dozen blogs that I’ve written on the Investor Self, archived under Stage 3 of the Traders Journal.

Lesson 2
Liquidity and sentiment are the main drivers of asset-class-level returns in the short and medium run
In other words, fundamentalists may be correct in the very long term, but chartists will make money in the meantime. This also supports my blogs on the importance of ongoing asset allocation efforts to produce consistent profits.

Lesson 3
Simple strategies can work just as well, if not better, than complicated, overthought strategies
Hallelujah! This has been the foundation of my Tensile Trading approach for a decade and a half.

Lesson 4
Incentives are everything
Some asset management companies engage in pure asset accumulation, to the detriment of their clients. They charge asset-based fees and essentially become closet index funds. Investors should not pay for this. It is precisely for this reason that I advocate an assortment of asset allocation baskets which comprise your total portfolio. Some asset baskets are indeed best covered by ETFs with low fees and indexed performance is what you get at a great price. Other asset baskets I’ve written about are best covered by asset managers, running actively managed mutual funds where they have produced a historical record of consistent outperformance which not only covers their fees but produces profits above and beyond their asset class benchmark. The Primecap Funds come to mind here.

The bottom line is that individual investors can add a great deal to the performance of their portfolios by spending more time and effort on the bigger asset allocation decisions and using the top 100 ETFs to help them remain consistently on the right side of the most appropriate asset classes. Asset allocation remains a crucial, high-leveraged activity for properly disciplined investors and a fundamental key to success.

Trade well; trade with discipline!
-- Gatis Roze

P.S. Click HERE for information on my future appearances & seminars.
October 17th, 2015- ASSET ALLOCATION WORKSHOP with Gatis Roze & Chip Anderson.

P.P.S. For both convenience & consistency, please click HERE to automatically receive my blog once a week as soon as it comes out.

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Appreciate the acknowledgement of Mr. Lee. Sharing his insights as compared to what you have taught for years is instructional. Thank you
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