INCLINE VILLAGE, Nev. — Technical Analysis of Stocks andamp; Commodities magazine recently interviewed me for its June issue. The subject was exchange-traded fund (ETF) analysis. I’ve posted the full interview on my blog at www.ETFportfolios.net. Here are some of the topics that were covered in the interview.Topic 1 - ETF analysis compared to equity analysisFor market technicians, the analysis techniques are mostly the same. Chart pattern analysis works for both security types, and price-based indicators, such as moving averages, are also valid for both equities and ETFs. The real distinction comes in volume analysis. Technical indicators that use volume as an input need to be applied in a different way. That’s because, unlike for stocks, the number of shares associated with an ETF can change from day to day.An ETF doesn’t have to jump in price in order to complete a large buy order. Instead more shares can be created in order to fill the order. Because of this, it is better to analyze the volume of an ETF’s holdings instead of the ETF itself.Topic 2 - Sector ETF rotation strategiesMy model, one that I use for client accounts, uses relative strength to switch into the strongest performing sectors. The model looks at six-month performance and then places more weight on recent activity. The strongest performing sectors are held. These relative strength rankings are published for free each weekend on the Analysis page of www.ETFtradingstrategies.com.I view sector rotation as a somewhat market independent strategy. I say “somewhat” because in almost every market environment there is a sector that does well. It is only in the most vicious bear markets that every sector goes down.Topic 3 - Inverse ETFsInverse ETFs move in the opposite direction to a particular index. For example, an inverse Sandamp;P 500 ETF will rise in value on a day that the market falls. While lawyers point to the small print and say these ETFs are working, most investors would disagree. Because of compounding, an inverse ETF can behave very differently from what one would expect over long holding periods.The inverse ETFs can be used, but only by traders who use a holding period of a few weeks or less. These are not good buy-and-hold ETFs.Topic 4 - DiversificationI cringe when I hear an advisor say to a client, “Don’t worry, your portfolio is diversified.” The problem is that securities move independently during bull markets, which is when diversification is not needed. Then a bear market arrives and all of a sudden securities start to move in lockstep. Just when diversification in needed, securities become highly correlated. I think of it as “diworsification.”— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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