Hi Allen, Re: ETFs, investing and AIM.................
Remember that AIM and ETFs isn't necessarily about volatility capture and frequent reversals. It's more about Trend Capture than volatility capture.
If you had a scale of 1 to 10 and 1 was the end that represented broadly diversified traditional mutual funds and 10 was high growth stocks in a fashionable new industry, then business sector ETFs fall in the middle. They don't have single company stock volatility, but they also don't have single company stock risk. They are a reasonable compromise between the two extremes. More like Mr. Lichello's original hypothetical model, ETFs tend to go in one direction or the other for a period of time. So we should expect multiple buys in a row followed later by multiple sells in a row. However, our expectations might not ever be the way things happen. During early 2014, Healthcare dipped deeply enough for that sector's ETFs to have triggered a nominal buy. But they didn't continue on down. They reversed direction and by year's end had even possibly harvested some AIM profits.
Sector ETFs will benefit from sector rotation when it occurs. Sector ETFs generally don't suffer as much from an adverse single company event as many of the other companies in the same sector may gain market share because of the event. Many sector ETFs tend to be near equal weight which further dampens risk, even if it also may dampen upward performance.
While ETFs aren't necessarily as exciting as individual company stocks, they can be profitable given the key factor of time. Also, 52 weeks is barely enough time for AIM to begin to show its potential. A 52 week period with only selling going on is statistically the worst period that AIM can have. While a 52 week period of only buy signals may not feel great, it is where AIM is doing its hardest and best work. It's where most people freeze up and don't do what they should be doing just when they should be doing it.
If we had been having this discussion in 1999 or in 1989 would ETFs have been a bad investment? How about in 2007? Time and AIM have a way of healing wounds that might occur on any specific date. That's why we use it. Like many studies have shown, time out of the market has been many market timers' biggest downfall. AIM moderates our exposure without missing out on the potential gains over time. If the ETF we own gains 15% in a year but triggers no AIM activity, it is a bad investment?
While ETFs aren't everyone's choice, they do have merit for many investors. While individual company stocks might get some people into trouble by not being diversified enough, those with enough capital to invest in a variety of individual company stocks regain the diversification needed to dampen single stock disaster if/when it occurs.
So if there are lessons to be learned, we need to remember how to apply those lessons. The correct answer for one person isn't necessarily correct for everyone else. For instance, is it better to own one oil company stock, a filtered oil company ETF with 40 companies in it, a general energy index ETF, cap weighted with 250 companies in it or a mutual fund that happens to have energy stocks in the mix of 600 companies owned?
"Better" for one person might be dull for another. Both might be right on a personal level but not for both.
AI
