How to Profit From an ETF Trend That has Passed You by
NEW YORK ( ETF Expert) -- With a yield on the 10-year treasury note near a paltry 2% at the start of 2012 -- as well as a five-year annualized rate of inflation of 2.25% -- purchasing iShares 7-10 Year Treasury (IEF) had few fans in the media.
What's more, few investors may have been willing to commit large sums of capital to an investment where one is likely to lose purchasing power; neither preservation nor price appreciation seemed probable.
In fact, in the initial three months of the year, IEF struggled to hold its 200-day simple moving average. For shareholders, it appeared that the 30-year trend of declining interest rates might actually be reversing. And for treasury bond vigilantes, it seemed like vindication was at hand.
In mid-March, however, three-month Libor rates were no longer declining. Greece began flaring up. Spanish and Italian bond yields were hitting unsustainable levels. Energy stocks were tanking. China's growth slowdown was becoming more apparent. Suddenly, safety seekers became enamored with intermediate U.S. government debt once again. The price of IEF bounced off a key trendline, catapulting to new heights. Keep in mind, though, the last time (February) that IEF pushed as much as 5% above a 200-day moving average, the fund eventually reverted back to the mean. It follows that buying IEF after it nearly pushed 5% above its 200-day at the start of June might result in a classic example of "buying high." In essence, when a trend has passed you by, there are several reasonable options for consideration. You may wait for the asset to pull back to its 200-day, and acquire shares at what you believe to be a discount. With this approach, you risk the possibility that the asset will continue to plummet into a bearish environment. Another venerable method involves looking at another asset that may benefit from the same general uptrend. For instance, iShares Conservative Allocation (AOK) emphasizes exposure to fixed income while still allocating a small amount to stocks for dividend and diversification potential.
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