Interview David Vomund and The World Of Exchange Traded Products
David Vomund is the president of Vomund Investment Management, an investment advisory company that specializes in managing exchange traded fund (ETF) portfolios. While other advisory firms are only now discovering ETFs, Vomundís firm has an exceptional nine-year track record of ETF trading.
With more than 20 years of investment and portfolio management experience, he is a frequent speaker at national investment conferences. Vomundís analysis and forecasts have appeared in many publications such as Active Trader, Los Angeles Times, and Barronís, and he was our interview subject previously, in the October 1999 issue of Stocks & Commodities.
The author of two highly acclaimed books, ETF Trading Strategies Revealed and Exchange Traded Profits, Vomund is methodical and practical in addressing both the technical and behavioral approaches to investing. Several of the methods discussed in these books are applied to his management account program. He also publishes VIS Alert.com, a weekly newsletter that covers market timing, ETF rotation, and stock selection.
This interview was conducted via email, with S&C Editor Jayanthi Gopalakrishnan sending a series of questions to Vomund. The interview was completed on April 16, 2012.
David, how did you get interested in technical analysis?
You know how your first job after college is always very important in determining your future direction? My first job was in the technical research department for a small investment newsletter company. I am a numbers guy so it suited me well, but this was in the mid-1980s, so a lot of the work was by hand. We had some impressive-looking point & figure charts! A bull market was on, so we had to tape graph paper to the top of existing charts because prices were literally going off the charts. We also did a lot of work with sector rotation, something that is still important in my analysis.
What led to your interest in exchange traded funds?
We have to learn from every bear market so that mistakes are not repeated. I learned from the 2000Ė03 bear market that you need to be flexible in the type of analysis that you use. For example, growth investors did very well in the 1990s, but then value investors fared better in the early 2000s. Along the same lines, the large-cap stocks in the NASDAQ 100 performed best in the 1990s, but small-cap stocks performed best in the early 2000s.
As market conditions change, your trading style will move into and out of favor. We have to be flexible, but that is easier said than done. It is hard for a growth investor to employ a value strategy, and it is hard for a value investor to employ a growth strategy.
I am a growth investor so it goes against my nature to buy undervalued, high-yielding value stocks. Thatís where ETFs come in. Instead of forcing myself to become a value investor when growth investing is out of favor, I can just buy a value ETF.
So in 2003 I began a managed account program that used a mechanical strategy to, in effect, jump around the Morningstar box. If large-cap value stocks are leading, then Iíll own a large-cap value ETF. If small-cap growth stocks are in favor, then Iíll buy a small-cap growth ETF.
ETFs gave me the flexibility to employ whatever style of investing was in favor at the time. Nearly 10 years later, the portfolios, after all the fees, have almost doubled in value.
You have done a lot of work with ETFs, publishing a couple of books on the subject. How is trading ETFs different from trading equities or futures?
In many ways it is the same. The chart patterns that we employ on stocks can also be used on ETFs. The price-based indicators that are used on stocks, such as moving averages and stochastics, can also be used on ETFs.
However, there is a real distinction when it comes to volume analysis. Indicators that use volume as an input need to be used in a different way. The price of a stock or an ETF is determined by supply and demand, but the supply side of the two securities is very different.
If an institutional investor places a large buy order on an illiquid stock, the stock will jump in price in order to execute his order. If, on the other hand, an institutional investor places a large buy order on an illiquid ETF, then more shares can be created in order to fulfill his order. The ETF doesnít have to jump in price in order to complete the buy order.
The divergence between the two securities, therefore, is that for stocks the supply is generally fixed. For ETFs, the supply side can change so it is possible to have declining prices at the same time there is an influx of buy orders.