A.I.M. For Exchange Traded Funds

[ls7550]

I'm feeling more confident that sticking to sector ETF's is the way for me to go at this time. Also got the message that larger trades less often are more profitable than small and frequent.

Larger trades less often are not always more profitable. It's a balancing game. If the trade range is too wide then the position becomes little different to that of buy-and-hold, never adding nor reducing.

On a gross basis the smaller more frequent gains should compare equally to larger less frequent gains. Where the larger trades however are never triggered then the smaller more frequent approach is generally the better (for volatility capture benefits). Where the two compare on a gross basis however then obviously the fewer large (less brokerage fees) trading approach is the better choice.

ETF's are a good choice of candidate holdings but require a sizeable amount of funds to be able to diversify across a range of such ETF's (if AIM'ing each individually). Generally you'll want to invest no lower than $20,000 in stock value (perhaps $30,000 total) per ETF AIM account.

Where funds are limited then you may be better served with a single market ETF such as one that tracks the Dow. The initial appearance is that Index funds don't provide sufficient price volatility for AIM's needs - however - consider as an example one of Tom's IRA ETF holdings - DLS. Since mid June 2006 to present DLS had an average of 1.53% daily high/low price range. In contrast the Dow had 1.2%. If instead of the Dow the DDM (2X Dow) had been used then the daily high/low average range was 3.3% over the same period.

Which implies that a blend of 1.2(Dow) + 3.3(Ddm) = 1.53(Dls) (e.g. a blend of 15.7% DDM and 84.3% Dow) would have been comparable in daily volatility terms to DLS over that period.

On an actual gains basis DLS made a -40.6% loss, the Dow -27% and DDM -63%. On the one hand we have DLS declining -40.6% and on the other we have a blend of 84.3% Dow and 15.7% DDM exposure declining a combined -32.65% (in proportionate terms).

A benefit of using a blend of 1X index and 2X index in such a manner is that you don't actually need to use the 2X until all of your cash reserves are exhausted. If for instance currently 60% 1X and 10% 2X exposure levels were being indicated then that amounts to an overall exposure indication of 80%, which could be actually managed by holding 80% in the 1X and thereby avoiding the generally higher costs involved under 2X funds.

Another factor is that a blend of ETF's will at times have some up, others up less (or down) which overall will have a tendency to make the overall ride smoother. If you then periodically rebalance between those, reducing the ones that have risen the most, adding the proceeds to the ones that have performed less well, then you'll also be doing a bit of a AIM like style across the individual accounts. This is where over the longer term the multiple ETF AIM approach can add value over the single Index AIM based approach.