ETF Investment

Tutorial for New Users

First-time ETF investors can learn from this tutorial the specific approach needed to begin investing the ETFOptimize way! Learn what to do and what to avoid to get the best entry and exit prices—thereby maximizing your investment profits over time.



Making Your Strategy's First Trades

Now that you have a subscription to a professionally constructed, ETFOptimize quantitative strategy, you will need to implement your strategy's recommendations and put this exciting new tool to work for you. This Tutorial will help the new investor make their first purchases of individual Exchange Traded Funds (ETFs). This tutorial can't address every broker's online interface, so if you need specific assistance with your broker's order-entry system, you should contact your broker directly. Your broker wants you to be successful—to continue investing over the long-term—and they will usually be very helpful in answering your questions and accomodating your needs.

Once you have logged into your broker's website and navigate to the order-entry page, you should refer to your ETFOptimize Premium Strategy page (accessible from the 'Active Subscriptions' section on the Subscriber's Home Page/Menu). You will need to review the first section of the page, labeled 'HOLDINGS,' to find out the ETFs your strategy currently owns.

The Holdings Section provides three crucial tables; 1) Most Recent Changes, 2) Current Holdings, and 3) Holdings – Historical Details, in that order. ETFOptimize subscribers need to check this information each week to implement their model's recommendations – therefore, we have listed this information for you, in the three tables mentioned, at the top of the page.


Once you have subscribed to a Premium Strategy and your first Sunday has arrived, whether your model recommends a new trade is critical information, so we communicate that info via the STATUS box at the top of the first section, just under the 'HOLDINGS' heading.

If your strategy Has Position Changes, that information is stated clearly in the STATUS box – with red lettering so you can't miss it. Alternatively, if there are No Changes, we will also communicate that info in the STATUS box, sans the attention-getting red lettering. You can see an example of a week with trade recommendation presented below.

If there are trades, the top three tables of the HOLDINGS Section of your model will look like the example below, consisting of three crucial tables: 1) Status box, 2) Most Recent Changes, and 3) Current Positions. These three tables will tell you everything you need to know to make your trades on Monday.


This model holds THREE EQUITY ETFs at ALL TIMES
Each of the three ETFs are equally weighted at 33.33%



This Strategy HAS POSITION CHANGES this Week!

– See the "Most Recent Changes" section below for details of the most recent update –


All Premium Strategy pages are updated each weekend. If there is a change to holdings, we post those details in the table below. Please check the date listed on the far-left of the table below to see if this model has trades in the next market session (usually on Mondays). Otherwise, the most recent position change remains posted here.


From the second column in the Most Recent Changes table (first table on the page) shown above, you can see that for this particular weekend, this model is selling five positions (designated by 'SELL') and buying three new ETFs (designated by 'BUY'). The reason the table shows fewer Buys than Sells is that two of the ETFs are being held by more than one Premium Strategy after the update.

For example, in the table above we can see that TLT is heavily weighted at 47%, and that's because it is being selected by three different models. Similarly, SHY is being held by two strategies that contribute a total of 27% to the composite. We can probably draw the conclusion that the market had, at least temporarily, entered a higher-risk period that called for low-risk Treasury Bonds.



We publish UPDATES to all Premium Strategies by midday each Sunday. All your trades should take place around the middle of the day on Mondays  (Tuesday if Monday is a market holiday) following the strategy's publication on Sunday (the day before the purchase/sale).

So what does "midday" mean exactly? Well, you don't need to be obsessive about making your trades precisely in the middle of Monday's market session, but you should try to avoid the opening hour and the closing hour. The reason is that those hours are usually very volatile because that's when day traders, hedge funds, institutional investors, and other market movers are getting into or out of trades of individual stocks.

Since the ETFs we use as investment vehicles own dozens, hundreds, or even thousands of individual stocks, and the price of each ETF is based upon the underlying price of those stocks, ETF prices can sometimes be very inaccurate and erratic during these volatile and higher-volume opening and closing hours. During the opening and closing hours, market-makers are often simply guessing at the appropriate fair-value price for the ETF you might attempt to buy or sell because the price of the underlying stocks can change so quickly. Alternatively, the middle of the day is usually the least-volatile stretch of the day and ETF prices are much more stable. Therefore, if you make your trades on Monday/Tuesday between about 11:00 AM and 2:00 PM EST, you should get a reasonably fair and accurate price that reflects the value of the stocks in the index upon which each ETF you are trading is based.

Market Hours: The stock market is open from 9:30 AM - 4:00 PM EST Monday through Friday, with about 10 market holidays each year during which the bourges are closed. If, on any particular Monday the market is closed, you should make your trades between 11:00 AM and 2:00 PM on Tuesday.



Don't make your trades during HIGH-VOLATILITY DAYS

If big news is rocking the stock market on a particular Monday when your strategy has scheduled trades, sending prices shooting sharply higher or lower – that is, prices are incredibly volatile on that Monday – you should probably avoid trading that day for the same reason we avoid the opening and closing hours; ETFs can be mispriced at those times. If things have calmed down by the afternoon on Monday, or perhaps the following day (Tuesday), your trades can be filled then.

Volatile market conditions present potentially pernicious conditions for making ETF trades – whether you are buying or selling. Whether the source of the volatility is fear-based panic from bad news or greedy overenthusiasm from good news, wide price swings can cause you to get position pricing unhinged from reality – and you should avoid those times if possible.

As an example, imagine buying or selling ETFs in September 2008 – when stocks were experiencing a waterfall selloff associated with the Financial Crisis. During that month, there were some days with +15% to -15% intra-day swings in widely traded, high-volume ETFs such as the SPDR S&P 500 Fund (SPY). Moreover, during the 2015 Flash Crash, some ETFs were down by as much as -60% at the market open. However, by noon of that day, they were back to their accurate price and market conditions were calm.

Generally speaking, you'll find that a policy that avoids trading during high market volatility will serve you well throughout all aspects of your investing activities, and not just ETF-investing.





New subscribers frequently ask whether they should buy all the ETFs listed in their model(s), or to wait until their model recommends new ETFs. Going forward, it is challenging to predict when your Premium Strategy will buy a new ETF (or ETFs), since each model has a different average hold time, and sometimes a model will hold a position much longer than the average if the market is in a steady upward climb and the ETFs held have not gotten overextended.

Therefore, when getting started, we recommend that new subscribers should probably buy each of the ETFs listed in the Current Holdings table. We believe it's best to jump in and get started by putting your money to work immediately. 

For your first transactions – when you have no investments based on your strategy's holdings, you should refer to the second table on your Premium Strategy page, labeled 'CURRENT HOLDINGS.' This table shows the projected holdings of your model after Monday's trades (if any) are implemented. The most meaningful components of this table are the tickers of each ETF and the weights of each ETF in the model. This is the information you will need to enter your first purchases on your broker's website.

Keep in mind that whenever you place your trades, the ETF's price will invariably move slightly higher or lower between the time you enter the trade on our broker's website – and when the ETFs are are actually sold or purchased on the trading floor in New York. Some ETFs will be electronically purchased or sold in the cloud, and your shares may never be observed by a human after the trade leaves your desk. Such is the zeitgeist of our modern, digital world!


IMPORTANT: Is not necessary to stress about being hyper accurate on your position weights. Try to enter your ETF positions within about 1% percent of the strategy's target weights if possible. However, in the case of an ETF taking off and gapping higher on Monday's open, it may be impossible to get within 1% of Friday's target weight. If, over the subsequent weeks, any position in your strategy moves to a weight more or less than 3% from it's target weight, you should rebalance your positions to bring them back into line with the model's recommended target weights (listed in the second column of the 'Holdings' table).


Even though your order moved through the system at the speed of light (even if you live on the opposite side of the world from the exchange), it still requires anywhere from a fraction of a second to a couple of seconds for your order to be routed appropriately and executed electronically. During this miniscule amount of time, prices can (and likely will) move a tiny amount, so you will never be able to make your position weights match the position weights shown in our models.

Therefore, try to get your ETF weights to match your model's target weights, but realize that it will be impossible to match them precisely. Also we recommend that you should rebalance your portfolio if any ETF becomes more than 3% above or below its target weight! By 'rebalance,' we mean selling shares of the overweight ETFs and buying shares of the underweight ETFs in your portfolio to get them closer to the target weight. We do NOT tell you when to do this, as every portfolio is slightly different, but it is your responsibility to check your holding's weights and determine if any are +/- 3% from their target weight.

If you have a multi-position strategy, such as our 4-ETF and 9-ETF models, you will find the target-weight percentage listed in the "HOLDINGS" table near the top of your Premium Strategy page. These percentages provide the amount of each ETF you should own at midday on Monday (Tuesday if Monday is a holiday), after your trades are executed.

For our ETFOptimize Combo strategies, including the "Optimal Equity/Defensive (4 ETF) Strategy" and the "Ultimate 6-Model Combo (9 ETF) Strategy," you may see a very high weight of one or more positions listed in the 'Most Recent Changes' table (the first table at the top of each Strategy's Premium Page). Sometimes we will have two or more Strategies recommending the same ETF, so it will have a higher weight than you might expect.



If one of the model's ETFs is really charging higher during a particular week, and it gains enough equity to accumulate a weight that is 3% overweight, it would trigger a rebalance. This rebalance is done automatically by each systematic strategy, and we will not mention it in the 'Most Recent Changes' table. Each rebalance transaction will be displayed in the 'Last 20 Transactions' table near the bottom of the page, but it will not be mentioned in the more urgent 'HOLDINGS' section of your Premium Strategy page. The 'Holdings' section is intended to get straight to the point of what you should buy/sell next, and what holdings the strategy consists of after those changes.

In the 3-ETF example below, we have one ETF that has moved sharply higher over the last week, and while the other two ETFs may have not have lost money, their relative weight still has declined by about -1.5%. So you might see the weights change to this example scenario before you need to rebalance your portfolio:

ETF-1: 36.34%
ETF-2: 31.81%
ETF-3: 31.85%

In this situation, ETF-1 is 3.01% more than it's optimum weight of 33.33%, while the other two ETFs have essentially remained level, and each of them is now about -1.5% (more or less) below their optimum weight because ETF-1 has done so well. If you see a situation like this occur with your positions, you should rebalance each position (by selling 3.01% of ETF-1 and buying about 1.5% of ETF-2 and ETF-3) to bring them back to a proper weight balance of 33.33% each. However, only do this rebalance ONCE PER WEEK – on Monday. You don't need to watch it every day, and you shouldn't make a change unless one position has moved more than 3% from its traget weight.

NOTE: The proper target weights for your model's ETFs is designated just below the 'HOLDINGS' heading.

We are working on a Trade Widget that will calculate the number of shares you need to own of each ETF. This widget will be installed and available for your use on each Premium Strategy page. We will notify users when these installations are complete. In the meantime, you will need to pull out your handy calculator and calculate the shares each time a trade is recommended.



WARNING: For a rules-based strategy, checking your brokerage account balance and tracking profit/losses too frequently can be harmful to your wealth! Checking your account multiple times every day (or even worse - having a colorful trading platform with your holdings open all day long) is one of the most ubiquitous mistakes made by inexperienced investors. This tendancy to worry over losing money even haunts very experienced, emotionally detached investors from time-to-time.


The first rule of Rules-Based Investing is to not break the rules!


The ETFOptimize Premium Strategies are intended as a guide for Investors – our strategies probably won't satisfy Traders needs. The difference between the designations of investor and trader is an individual’s timeframe and expectations. Investors usually have a longer-term timeframe of months or even years for investments to attain their full value, while Traders typically have a shorter-term timeframe of days or a couple of weeks. 

Investors understand that it can require time for a particular investment thesis to play out. For example, if your model identifies that stock prices have rallied too-far, too-fast, it may switch to defensive ETFs. However, in the short-term, stocks may continue moving higher as the emotion of greed continues to dominate the markets. 

When this happens, and your portfolio is positioned defensively, you may see short-term losses for a few days or sometimes a week or two. For short-term traders, these single-day losses can cause great anxiety — while long-term investors, who are confident in their quantitative strategy's choices and shrug it off as being the last vestiges of a temporarily irrational market. In this example, those with an investor's perspective know their portfolio is positioned appropriately, and the holdings are based on facts and proven economic/price relationships.

The Trader, after watching the market continue higher for 4-5 days while his Premium Strategy's positions are losing a bit of money each day, is prone to pulling the plug on those defensive positions, canceling his ETFOptimize subscription, and buying long positions. The trader capitulates to a classic case of 'fear of missing out' – just in time to see the market reverse downward and his latest investments plummet in value.

You need to divorce your mind from the crowd. The herd mentality causes your brain to become paralyzed. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.
– Warren Buffett

One of our Inside Secrets of Investing blog posts addressed this exact scenario on February 20, 2020 – "Too-Far, Too-Fast (2020)." However, when the selloff did begin, our models were positioned correctly, and only our most aggressive model experienced a short-term loss. Instead, they quickly made up the previous set-back and began profiting.

By frequently checking and focusing attention on the daily profits and losses of your portfolio, you are placing a trader’s short-term perspective to a long-term, investment-oriented portfolio. The ETFOptimize models can certainly have days, weeks, and even months that when they will experience relatively small losses, but on a yearly basis, they have a perfect track record. 

The ETFOptimize Premium Strategies have a long-term perspective and are based on dozens of logical, well-proven leading indicators. However, in the short-term, the stock market can be illogical – even pathologically irrational – but in the long-term, it reverts to common-sense economic relationships.

Because of the occasional, short-term irrationality of the market, the ETFOptimize models will sometimes experience short-term losses when the market’s irrationality is opposed to the historical relationship with fundamentals. However, if you avoid checking your brokerage account balance frequently and maintain a long-term outlook and reasonable expectations, you’ll avoid the potential fear that can result when temporary losses are occurring, which can cause you to pull the plug on your investments – essentially wiping out the effectiveness of our systematic investment strategies. 

Each strategy shows its worst-case drawdown since inception in the Results Summary table on each Premium Strategy Page. For example, this Max Drawdown percentage for the Ultimate Combo Strategy is about -13% – compared to a drawdown of -55% for the S&P 500 benchmark.

The image below shows a Summary of the Ultimate Combo Strategy with its Annualized Return and Max Drawdown highlighted in yellow. Here you can see that the model has averaged an Annual Return return of 30% with a one-time Max Drawdown (peak-to-trough decline) of -13%:


The Ultimate Combo Strategy has an annual performance (30%) more than double the model's worst-case pullback (-13%).

This strategy shows that $100,000 appreciates to a balance of
more than $3 million in 13 years at a 30% Annual Return.*

*Past performance may not be indicative of future returns.


You can expect your portfolio to occasionally have pullbacks, and it’s a possibility that it will experience a drawdown equal to its prior worst case – or more – but it should quickly recover that short-term loss and resume its upward climb – as long as you don’t become frightened, and join everyone else in panicking to sell all of your shares. Maintain your head while those around you are losing theirs!


"Individuals who cannot master their emotions are ill-suited to profit from the investment process." – Benjamin Graham


Step 1) Adjust Portfolio Size With Set-Aside
Let's assume you have a portfolio size of $100,000 you wish to invest. You should first set aside a small amount – perhaps 0.2% to 1% ($1,000 to $5,000) – to leave as cash in your portfolio to accommodate slippage in the price on your trades. In our models, we use the average price for each position that is purchased or sold, but between the recommendation (using Friday's prices) and the fill (using Monday's prices) there is usually some change in price. Because our models usually use positive momentum in the selection of the ETFs, the prices tend to go up between Friday and Monday. In this case, let's assume you decide to set aside $2,000. That would leave you with a net of about $98,000 of investable funds from the example $100,000 starting balance.

Virtually every major brokerage eliminated commissions for ETF and stock trades in October 2019, so this slippage of price is the only transaction cost for which you will need to allow. 'Slippage' is the amount an ETF's price might move up or down after you hit the ENTER button on your broker's website.

It's a shame to not have every dollar working for you, but if you don't have this small cushion of cash sitting in your brokerage account, the price on an ETF you are trying to buy may slip higher and you might not have enough funds in your account to fill the trade. You may have to reduce the number of shares you were attempting to buy – or wait until your broker clears your funds from the last transaction before you can make your purchase.

Step 2) Pricing Your ETF
Visit your online broker's website and navigate to the order-entry screen or trading screen to look up the first ETF listed in Current Holdings
. In this case, let's assume you are trying to buy SHY (iShares 1-3 Year Treasury ETF). Entering the ticker should populate pricing information that shows the most recent quote for the BID and ASK price for SHY. Since you are trying to buy in the secondary market, where investors buy-from and sell-to other investors, you can use the listed ASK price as an estimate of what you will have to pay per share for your purchases.

In the future, you should probably use a Limit Order, but we will address these in another tutorial. Limit Orders can set a ceiling or floor in the price of the ETF you wish to buy or sell. However, what is most important is that you get your trades executed that Monday. In subsequent days, the ETF's price can change dramatically, so you'll want to buy on the day after your Strategy's recommendation if at all possible.

We have seen investors go for weeks waiting to get a satisfactory dip in price before they buy – weeks in which the target ETF continued to grind higher – and the investor missed out on big gains. For this reason, we recommend Market Orders for inexperienced investors, entered on the day after a recommendation.

Step 3) Calculate the Number of Shares
Next, calculate
$498,000 (the size of your tradable portfolio after Step 1) X 27% (the weight listed in the table for SHY) = $134,460 of your portfolio that you should invest in SHY. Let's say that this ETF is available at an average price of about $86.75 at midday on a recent Monday. Buying at this time, you would calculate that you should purchase 2,348 shares of SHY.

The number of shares is easily calculated by dividing the amount recommended ($134,460) to invest in SHY by the approx. current cost per share ($134,460 / $86.56 = 1,553.37 or 1,553 shares when rounded to the nearest integer).

Keep in mind that the ETF's price is going to move around a bit while you are placing your trade. Don't worry about this. It is normal as buyers and sellers are connected by the exchange. Remember that you set aside $2,000 in Step 1 to allow a little wiggle room on your trades. Some trades will cost a little more than you expected and some will cost less, so the $2,000 balance will change a bit with each trade.

Step 4) Order Type and Bid Duration
Enter 1,553 shares of SHY
, and place your order as a Market Order.

Limit Orders vs. Market Orders: Generally speaking, we recommend that subscribers use Limit Orders when entering trades, but we will discuss this order type in a seperate article – it is beyond the scope of this introductory article. FYI: A Limit Order will make sure that that nobody takes advantage of you in your ETF purchases and sales, but this is something that rarely happens with the kind of high-volume, widely traded ETFs used in the ETFOptimize Premium Investment Strategies.

Over the course of a year, Limit Orders are probably worth the small extra effort, but for most of the high-volume ETFs that are in the ETFOptimize universes, they are not necessary. The Bid-Ask Spread is usually so small in the ETFs we use that a Limit Order is not necessary. For the purposes of this introductory tutorial, we will simply use Market Orders example because it will eliminate an additional calculation you need to make. On your broker's website, you will be asked what type of order you want to place for each ETF you purchase or sell, and when getting started, you should select a Market Order.

Bid Duration: When you select the type of order, you will likely also see a pop-up asking if you want this order to be Good for Day or Good Until Canceled. Since we are dealing with relatively high-volume ETFs using a Market Order, your order should be filled fairly quickly, so you can choose Good for Day.

Step 5) Repeat – Rinse and repeat for the other ETFs in your strategy. We'll provide another example:



Let's assume the next ETF listed in the 'Most Recent Changes' Table is IYH – the iShares US Healthcare ETF.

Step 1) You still have a small 'slush fund' of cash ($2,000 in this example) that you set aside before the purchase of your first ETF.

Step 2) To determine the $ amount allocated to IYH, multiply the percentage shown for the weight of IYH in the second table (10.00%) times your $498,000 net portfolio size = $49,800 allocated for the purchase of IYH.

Step 3) Determine the # of shares you'll buy of IYH. When you look up IYH on your broker's website in the middle of the day on the transaction day, its price is going to be moving around slightly as investors bid the ETF up or down at any given moment. That's okay – just make a mental estimate. Remember, you already set aside $2,000 so you would have some leeway when making transactions, so your estimate doesn't need to be rocket science. If the price is moving around too wildly to make your estimate – you should probably hold off on placing your order until that particular ETF (or the overall market) calms down a bit. That may be an hour later, or may even be the next day.

In the middle of the day on Monday, let's say the ASK price for IYH is $215.80 – therefore, divide the amount of your portfolio allocated to IYH ($49,800 from Step 2) by its approximate price per share ($215.80) = 231 shares that you decide is a reasonable amount to enter when purchasing IYH for your portfolio.

Please don't worry about allocating the absolutely precise percentage amount to each ETF – i.e., the price to the penny, or a highly specific number of shares. Again… perfect accuracy in your purchases is not required.

Step 4) Enter a Market Order for 231 shares of IYH with your broker, make the order 'Good for Day' – and move on to the next ETF!


Visit our  ETF Investment Strategy Suite





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