ETFs in 2008 - What Lessons Can We Learn?

What a difference a year makes! Earlier this year, I highlighted the 2007 returns for various stock markets, including emerging markets, as well as sector ETFs. Some of these obscure ETFs spanned the realm of imaginative sectors from the "Emerging Cancer" ETF to hot button items like "Alternative Energy" ETFs. It is therefore instructive to review how some of these hot ETFs performed year to date in 2008 and what 2009 has in store.

2007 vs. (2008) US Returns (major indices):

S&P 500 (SPY) 5% (-44%)

Powershares QQQ Trust (QQQQ) 18% (-44%)

iShares Russell 3000 (IWV) 4% (-41%)

Dow Diamonds (DIA) 9% (-35%)

2007 vs. (2008) (select) International Markets:

iShares Latin America 40 (ILF) 40% (-54%)

iShares Emerging Markets (EEM) 33% (-55%)

iShares South Africa (EZA) 22% (-49%)

Powershares China (PGJ) 57% (-60%)

Remember all that talk about "decoupling" and how owning international (especially the fast-growing emerging markets) ETFs would provide you with a low correlation asset? Out the window. Well, OK, they didn't perform the same, they did much worse than the US indices. Now, for a few select imaginative sector ETFs...

2007 vs. (2008) (select) Sector ETFs:

*HealthShares [HS] Cancer (HHK) 15% (-29%)

*HS Emerging Cancer [HHJ] -35% !!Closed!!

*HS Diagnostics (HHD) 26% (-39%)

* Note, these HealthShares are only as of March 2007

iShares Energy (IYE) 42% (-40%)

iShares Financial (IYF) -21% (-55%)

Market Vectors Gold Miners (GDX) 21% (48%)

**Market Vectors Global Alt Energy (GEX) 47% (-67%)

**since launch in May 2007

***Market Vectors Agribusiness (MOO) 40% (-59%)

***Since launch in Sep 2007

The takeaway from the selected sector ETF review is that for investors that jumped into the hot sectors of 2007 like Agristocks and Alternative Energy, were hit especially hard. This is further evidence of the herding that occurs during bull markets and the subsequent fallout for those left holding the remnants.

For a full snapshot of all the ETFs reviewed for 2007, visit this article.

Disclosure: The author trades SPY, QQQQ, UYG and engages in pairs/hedged positions with combinations of each.

Comments

[Eskin:]

Just to be fair, look at the other side of the story as well (to name a few):
PSQ - up 53% in the last year
DOG - up 34% in the last year
SDS - up an incredible 70% in the last year
SKF - up 48% in the last year

I'm not saying that anybody could have predicted bad times coming and thrown money at these ETFs, but I felt this article could use the other hand as well, and ETFs could have been incredible ... if the right ones were purchased.

2008 Dec 04 08:13 AM

[Everyday Fi...:]

It's not really apples to apples when citing inverse ETFs; in a down year for the market, obviously a 2x inverse ETF will have performed well. Since the long term trend for the market is up, not down, holding inverse ETFs for the long term is not a sound strategy. I use them occasionally for hedging or if I feel a rally is overdone, but to hold them for a year (without the benefit of hindsight) is probably not a strategy most investors should consider.

2008 Dec 04 08:21 AM

[carey_jim:]

We need to memorize a lesson that everyone already knows but that we all seem to WANT to forget:

It is virtually impossible to predict the future, economic or other with accuracy. Therefore, seeking Alpha is also seeking financial self-destruction. Seeking shelter is something else.

I could provide many wise quotes, staring with Harry Truman's:

"If you can't stand the heat, get out of the kitchen."

and ending with Napoleon's:

"Misery has led to indiscipline, and without discipline there can be no victory."

But I wont :)

2008 Dec 04 12:16 PM

[Rob Viglione:]

Exploiting correlation variances between indices, sectors, and other ETF combinations was a profitable business for me up until this year. I'd become complacent with what I thought was the power of diversification, spreading bets across nearly every possible asset class.

The financial meltdown tore all that up, changing the rules of the game. De-leveraging the entire system has devastated nearly all asset classes, trashing the idea of decoupling and the dogma of diversification.

In retrospect, I should have adhered to healthy hedging practices, which I claimed to consider but never fully implemented...they seemed too costly at the time. Boy was I wrong!

All we can do is salvage what we can and look to the future. Here's a good article written by a colleague of mine that analyzes sector performance, comparing to earnings expectations in an attempt to discern a way to exploit potential variances:

www.thefreedomfactory..../

2008 Dec 05 02:36 AM