BY TRANG HO – Posted 2/17/2009
In a year in which the S&P 500
nose-dived 38% and the developed markets tanked 43%, not losing money proved
very difficult, let alone making it. But Chartwell Global Hedge ETFfolio earned
a whopping 58.03% gross return in 2008 by trading only ETFs.
Carl Delfeld, president of Chartwell
Partners and publisher of ChartwellETF.com, explains how going largely to cash
and trading inverse U.S. and international ETFs helped him pull off such a
feat.
IBD: How did you produce the returns that you did in 2008?
Delfeld: During the late summer of 2008, our
investment strategy shifted from more or less buy-and-hold to a much more
defensive posture.
The signals were abnormally high
relative valuations for emerging markets and the MSCI Emerging Market and
Europe, Australia & Far East indexes dropping and staying below their 50-
and 200-day moving averages.
From that point on, our cash
position normally exceeded 50% and our trading activity was much more
short-term oriented. We rotated into several ETFs that move inversely to
markets, such as ProShares Short MSCI Emerging Markets, (EUM) ProShares Short MSCI EAFE (EFZ) and ProShares Short Dow 30. (DOG) We capped exposure to these inverse ETFs at 20% of the
portfolio.
One other strategy was to identify when a country ETF — such as iShares FTSE/Xinhua China 25 Index (FXI) or iShares MSCI Brazil Index (EWZ) — was oversold. Periodically these ETFs would bounce
quite sharply, and we tried to get a piece of this rebound.
IBD: How do you determine when an ETF or country is oversold?
Delfeld: Primarily by looking at valuations
and the chart for trading history. When a market like Russia gets to three to
four times earnings, the likelihood of a rebound is high. Plus, the chance of
the government intervening to stimulate markets is also quite high.
It doesn't always work. New Ireland Fund, (IRL) which has come down sharply, is in such a financial mess
that there does not seem to be any bounce off the bottom.
IBD: What are your buy and sell rules?
Delfeld: In general, we are value-led,
momentum-check investors focused on country-specific and global ETFs.
We look at price-to-book,
price-to-cash-flow and price-to-earnings ratios and try to pick out those
countries that seem undervalued on a relative basis. Then we take a global
macro approach and try to assess what regions might outperform expectations.
Developed country ETFs are full of
multinational companies, and so are more a hybrid and sector play on the global
economy. But emerging-market ETF performance reflects more of what is happening
in their domestic economy.
Political events, such as elections
or new economic policies, also are important factors in emerging markets. For
example, normally it is a good idea to avoid India during an election cycle.
To manage risk, we cap exposure to
any one country or ETF to 10%. We cap the total inverse ETF exposure to 20% and
generally follow an 8% trailing stop-loss policy. We are comfortable with high
cash positions in periods of uncertainty.
IBD: Can you clarify what a
"value-led, momentum-check" investor is?
Delfeld: First you look for value based on
the metrics, but then you look to see if there is any price momentum. This
helps avoid the "value trap" problem. Deep value plus momentum is
ideal.
IBD: What's your trading strategy for
this market environment?
Delfeld: We have moved into some
commodity-oriented country ETFs such as iShares MSCI Canada (EWC) and iShares MSCI Brazil.
We have also added some gold
exposure and ProShares UltraShort Lehman 20+ Year, (TBT) which goes up with long-term Treasury rates.
One other area of keen interest is
long-term options. Some ETFs covering Japan, China and broader indexes offer
options out as far as January 2011. We are considering adding some on both the
put and call sides.
Suppose you think that iShares
MSCI Japan (EWJ) will rebound, but near-term it just isn't moving and all
the news is bad. You can purchase a call option (right to buy) on EWJ at a
strike price at $9 (good through January 2011), which is a price a bit above
the current price of $8.20 (as of Feb. 23). The price of this option is about
$1.80 per share. This gives you almost two years to wait for the rebound. |
