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Comparison of Sector Funds . . . a bias in favor of Fidelity

Costs of Trading
Rydex vs Fidelity

Rydex and Profunds can be traded daily without fees or loads except those imposed by your brokerage. However, Rydex and Profunds absorb substantial costs which hurts fund performance. Most Fidelity Selects bought and held outperform equivalent Rydex and Profunds.

Fidelity Selects have no trading fees when traded monthly.  For shorter-term trades there is a 0.75% back end load.

The chart shows transportation funds. Most, but not all Rydex sector funds underperform equivalent  Fidelity Selects.
Rydex funds can be traded more often than Selects. However, the FT Momentum Model suggests that weekly trading (yellow line) of Rydex performs much worse than monthly trading (Green line). Neither do as well as the monthly traded Selects (red line).

Optimal Trading Period

In testing, we have not uncovered a fund trading strategy that performs better with weekly trading compared to monthly trading frequency.

On the longer side, quarterly trading often does as well as monthly. Although usually with more volatility.

Not all Exchange Traded Funds are Cheap to Trade

ETF's can be a very expensive way to trade .

  1. Connect to the Internet.
  2.  Select  FT4Web's Internet Tab.
  3. Click the Browser Menu button.
  4. Ensure that the Charts/ Options/ Snapshots/ Frequency = 15 minutes and /Span =Week.
  5. Click the NewSymbol button.
  6. Enter IIH
  7. Click Trading Range Chart.

This should display the real-time comparison of  IIH and its relevant (underlying) index, YIH-X.

Traders must be wary of thinly traded ETFs. The ETF/index spread can be as much as 2-3%. Trading an ETF with a 2% spread is equivalent to paying 2% front-end load + 2% back-end load on an open end fund. 

Note IIH's trading range (black vertical lines) span 1-3% from the brown line, the ETF's underlying index. As of 11/2003, excessive spread is common for about a third of ETFs. The circled range bar encompasses about a 2.5% range.

The ETF./Indeex spread situation has been improving gradually with wider acceptance, and much promotion, of ETFs. Use the trading range chart to review each ETF before considering it for inclusion in a model. 

The menu illustration above shows the setup for the Trading Range Chart below. 

This trading range chart is available for every ETF and its underlying index.
This trading range chart is for SPY, the most popular ETF. It is a good example of what you would want in index/etf spread. It never ranges more than 0.1%.

Using Margin and Leverage Determines the use of Stocks, ETFs, or Funds

Leveraging Margin Accounts

For margin accounts, there can be a substantial difference in the way margin is permitted.

Most brokerages will not allow open end funds held to count toward margin for 30 days after purchase. However, there is no such restriction on ETFs.

For ETFs, the major consideration is marginability. Most ETFs, but not all, are fully marginable just like a blue chip stock.

Leveraging Retirement Accounts

Most retirement accounts do not allow margin purchases. However, it is possible to effectively leverage by using enhanced index funds from the Profunds and Rydex families. These funds use futures to increase their beta. 

RYVYX, for example, offers double the performance and volatility of the NASDAQ 100 Index fund like QQQQ. The costs of the futures in RYVYX is nearly equivalent to the interest charged for doubling your QQQQ holdings through margin.

RYVYX can also be bought in margin accounts, and can be margined, after 30 days for even more leverage . . . this is not a recommended strategy.