TimingCube - Exchange Traded Funds explained - exchange traded funds,equity index,diversification,soxx,spy

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Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

This week the markets behaved much the way they have for most of the first half of the year, hovering in a relatively narrow trading range with little conviction from either bulls or bears.

Despite some potentially important news events, nothing got investors going. From Monday's surprise transfer of power to an interim Iraqi government two days early, to the jump in consumer confidence to a 2-year high on Tuesday, and even the first interest rates hike in four years by the Fed on Wednesday, nothing seemed to matter much. The biggest move of the week came on Thursday when a disconcerting drop in sales by U.S. auto manufacturers, warnings in the tech sector, and a jump in oil prices combined to pull the markets down. Friday's government reports that U.S. job growth slowed sharply, and of a leveling off in the pace of the economy, came as most traders had checked-out in typical pre-holiday fashion.

The net effect for the week was that the Nasdaq 100 led the way down with a 1.15% drop, and the Russell 2000 and S&P 500 shed 0.85% and 0.80% respectively.

As a result, there was no change in our signal which remains a Sell.

Trend Timing School

Exchange Traded Funds explained

Exchanged Traded Funds (ETFs) have been a corner stone of TimingCube's index investing approach from day one. Since our early beginnings the number and variety of ETFs available have flourished and our initial focus on the QQQ - the Nasdaq 100 index tracking stock - has expanded to more indices and their corresponding ETFs. Their popularity has exploded and, combined, they now hold hundreds of billions in assets. ETFs are the most practical and economical investment vehicles at our disposal to implement the Trend Timing system. Because of their diversity, the seemingly endless choices available and their hidden pitfalls, the more you understand about these funds, the better off you are.

Before going any further we need to narrow the scope of this editorial to the types of funds that are germane to our Trend Timing system and weed out the ones that do not apply.
Let us first eliminate Closed-End ETFs (CEFs) which have a fixed number of shares that causes their price to be influenced by the demand for the fund itself, and can therefore deviate substantially from the price of the underlying assets.
We also need to drop fixed-income funds which seek to generate fixed income by investing in various debt instruments such as bonds.

The type of ETFs we will concentrate on can be identified as "equity index ETFs".

The name "Exchanged Traded Fund" aptly describes a security that is listed on a stock exchange, trades intra-day like any stock, and whose price fluctuates during the day as a result of offer and demand for the underlying securities. ETFs are extremely convenient and easy to use. They can be purchased and sold exactly the same way as any stock, using identical techniques such as limit and stop orders, short sales, and margin trading. A growing number of ETFs now even have options (puts and calls) associated with them.

The main characteristics of equity index ETFs are as follows:

Diversification
As the name indicates, equity index ETFs seek to track a particular market index by investing primarily in the securities that constitute that index. In effect, when you buy an ETF share you buy the entire basket of stocks making up the index, thus diversification. How much diversification you actually get varies greatly because, while some indices represent broad markets - such as the Nasdaq Composite - others can be extremely narrow. There is an index and an ETF for just about every slice and sector of the market. Some are industry specific like the SOXX index which is a proxy for the semiconductor industry or the Dow Jones Utilities which only holds 15 large utility companies. Others differentiate themselves by the size (market capitalization) of their constituent companies, small-, mid-, or large-cap. In addition, there are many region or country specific funds. Broad market funds are the bread and butter of Trend Timing. The more narrow and specific a fund is, the more likely it becomes that it will not exhibit good correlation with the broad markets and our Model.

Transparency, predictability, and safety
By definition an index fund has the clearly identified objective of tracking a market index, and there is no question as to what it invests in or what performance to expect in relation to the index, unlike actively managed mutual funds.
ETFs are highly regulated and scrutinized, and therefore are much less prone to all the illegal practices and fraud that have plagued the mutual fund industry.
Note that the market risk of an ETF (as in how much you can lose) is identical to the index it tracks and the type of underlying assets. Some ETFs like sector funds or emerging market funds can present extremely high risks.

Cost
While you still have to pay transaction fees (commissions) to your broker when you trade ETFs, they are much more economical to own than mutual funds. ETF expenses are drastically lower than both actively managed and index mutual funds (over seven times lower on average). As an example, a large popular fund such as QQQ has an annual expense ratio of just 0.18%, as compared to an average expense ratio of 1.4% for mutual funds.
Despite having to pay taxes on the capital gains realized on a given trade, ETFs present other tax advantages that can be significant. Because of a loop hole in the regulations, the purchases and sales of underlying securities by institutional investors to create or unwind ETF shares are defined as "in-kind trades" and are not taxed like the trades executed by a mutual fund manager. For some mutual funds such taxes can amount to upwards of 10% of the fund's assets per year.

Liquidity
Frequently viewed as a major advantage over individual stocks and mutual funds, liquidity does in fact vary widely from one fund to the next. The liquidity of a fund is a function of the liquidity of the underlying securities as well as the average daily volume of the fund itself. Liquidity of the largest and most popular funds such as SPY and QQQ is superb. Other funds are extremely thinly traded and highly illiquid. Iliquidity is never good because you might not be able to unload the shares when and at the price you would like, but when selling short, illiquidity can be a killer. Your broker may not have any shares to loan you in the first place, but even if he does, he has the right to "call away" these shares at any time, which most likely will be bad timing for you.

Since this editorial probably reads like a poster for the ETF industry, you may ask if there are any negatives associated with them. Well, in addition to a few potential pitfalls already mentioned, the most important thing to remember when shopping for an ETF is that they are not all created equal. We strongly recommend staying with the most popular and largest of the funds, in particular the ones that seek to emulate the broadest market indices.

For investors using qualified retirement plans such as IRAs, ETFs have another significant drawback: they can only be used to implement our "Long Only" strategy. This is due to the fact that shorting and margin trading is not allowed in retirement plans.

Related reading.

For a comparison of ETFs and mutual funds, read the "Am I better off using ETFs or mutual funds?" FAQ of the Week dated February 6, 2004
For a list of the primary ETFs recommended with our strategies, read "What to Trade".

FAQ of the Week

Question: What and who is behind the names TimingCube and Fraser?

Inquiring minds are puzzled by the name of our service as well as our company name.

The name TimingCube was directly derived from timing the "Qubes", the nickname often used in the industry to describe QQQ, the ETF we focused on at the onset. Other QQQ nicknames such as "triple Qs" only act to reinforce the number 3 theme inherent in a cube as well as the 3 dimensional qualities of the indices we now use, 3 years later.

Fraser Partners, LLC is the name of the legal entity doing business as TimingCube. The name was simply constructed by joining the first three letters of the first names of our founders, FRAnk and SERge. You can find out who they are in the TimingCube Management section of the "Media Kit" page in our "Press Room".

Warm wishes and until next week.

The TimingCube Staff

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