Investors leery of the huge up and down swings in the current stock market have been buying Exchange Traded Funds (ETFs) in droves. The main reason is that they track indexes and are usually less volatile than investing directly in stocks or mutual funds. An ETF, by the way, looks something like a mutual fund but it trades on an exchange like a stock.
Meanwhile, new ETFs keep hitting the market everyday to capture this trend among investors who see them as safer alternatives to the wild up and down swings we've seen in the equity market lately. Still,just like other securities, some ETFs eventually may move into the it may be time to sell phase.
Selling any investment has always been difficult for most investors. We see a stock or an ETFthat we like and we buy it because with think its going to grow over time and add value to our portfolio. Unfortunately, this doesnt always happen. Therefore,there comes a time when it makes more sense to sell a security than to keep holding on as it slides into oblivion. Does the name Enron or, more recently, Bear Stearns ring a bell?
So how do you know when your ETF has gone from "hold" to "mold" and it should be moved into the sell category? One trick is to think like a trader. Traders take an unemotional approach to the market fluctuations. That allows them to take profits on securities that may still go higher, and accept losses on those securities on the way down.
There are also two online websites designed to help you with that and to help you to figure out when to dump your ETF.
One site, SmartStops.net, tracks ETF and individual stock performance. It sends daily emails to anyone who signs up for them with suggested exit prices. The email alerts you if your ETF or stock falls below the SmartStops exit price at any time during the day.
This exit price is determined by each security's trading pattern, volatility, and other factors. For example, if your ETF falls far enough and fast enough, theres a good change its going to continue falling.
The service is free for the first ETFs or stocks. Anything more can cost you from $9.95 to $39.95 a month for larger portfolios.
According to Smartstops.net CEO Brent Collins, the site recently partnered with TD Ameritrade and may sign with other firms to offer a service that automatically sells an investors' stock or EFT if they drop below the SmartStops price.
The other site offering a similar service comes from the investment research firm Morningstar. Morningstar.com takes a slightly different approach. Morningstar analysts determine fair-value estimates for the ETF's underlying holdings. An exit price is calculated using those estimates, combined with data on the ETF's volatility.
Morningstar only offers what it calls a "consider selling" price for ETFs that are at least three years old. To use this service, you have to buy a premium Morningstar membership for $16.95 a month. So far this year, 25 ETFs have closed while another 150 have come on to the market. As usual, analysts are divided over whether the ETF market is still growing or if it has already hit the saturation point.
One analyst for Morningstar, Dan Culloton, is quoted as saying "There are a lot of ETFs that won't exist in the coming years, because they were bad ideas or sponsored by people who don't have the staying power to see these funds get to a critical mass."
All you can do is keep your eye on the prize and if it starts to fall too far and too fast, follow either Smartstops or Morningstar's guidance and sell before it's too late.