2008’s ETF Dogs Could Be 2009’s Opportunities

While most sectors of the market meandered off the upward climb with a steep plunge in 2008, there were a few exchange traded funds (ETFs) that persevered and rose to new heights.

Investors are always on the lookout for that new money-making deal that would help fill their lonely pockets with a fistful of cash, but those who choose incorrectly may have even lost the pants that those pockets were in.

According to John Spence for The Wall Street Journal, 2008 was not a kind year for traders investing in:

• SPDR S&P 500 (SPY): dropped 37%
• iShares MSCI EAFE Index Fund (EFA): dropped 41%
• PowerShares FTSE RAFI Emerging Markets Portfolio (PXH): dropped 45%
• ProShares Ultra Financials (UYG): dropped 85%
• iShares Dow Jones U.S. Home Construction (ITB): dropped 43%
• Commodities and material ETFs also took a beating. Most notably, oil ETFs and exchange traded notes (ETNs) that saw that drop of oil to below $40 a barrel. United States Oil Fund (USO) dropped 56%.

The important thing for investors to keep in mind is that some of the most beaten-down sectors will have the best opportunities for a recovery later. Some real bargains are lurking around the markets right now, so eye these funds and see if they move above their trend lines before you consider whether they’re right for you and your goals.

On the flip side, there are those lucky few who did not choose lemons in 2008 and profited with ETFs and ETNs such as:

• ProShares UltraShort S&P 500 (SDS), a leveraged, bearish fund designed to short the market, gained 61%.
• Long-term Treasury bonds sensitive to rate changes benefited from near zero Fed rate cuts. Vanguard Extended Duration Treasury ETF (EDV) gained 55%. iShares Lehman 20+ Year Treasury Bond Fund (TLT) gained 34%. SPDR Lehman Long Term Treasury ETF (TLO) gained 24%
• Currency ETFs that tracked the weakness of the dollar to other currencies also benefited. iPath JPY/USD Exchange Rate ETN (JYN) gained 23%. Rydex CurrencyShares Japanese Yen Trust (FXY) also gained 23%.

Overall, markets greatly shrunk in volume, but investors still continued to invest in ETFs. Market turmoil is also said to raise questions regarding ETNs and their innate credit risks for investors.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Comments

[commoinsens...:]

very timely article. you may want to cautionthe user here on UGY. Given the current situation with CITI and a few others I think the opportunity is SKF not the opposite...

Jan 12 04:09 PM

[PastTense:]

commonsense1211: The banks have too many buddies in both the Republican and Democratic parties--as well as in the Federal Reserve. So no matter how badly they do; they will get bailed out.

Jan 12 09:58 PM

[OKMONEY:]

I don't think it's so much the "buddy system" that will keep banks not only afloat but thriving but the inescapable fact that meaningful commerce literally stops when banks get too bearish. What we have to watch out for is too much banking power in too few banking hands which seems to be happening in Hank Paulson's apparent theory of survival of the fittest. Might be a good theory if you knew who were the fittest. Do you think the Treas. does due diligence like we do before they invest our money?


On Jan 12 09:58 PM PastTense wrote:

> commonsense1211: The banks have too many buddies in both the Republican
> and Democratic parties--as well as in the Federal Reserve. So no
> matter how badly they do; they will get bailed out.

Jan 13 09:58 AM

[a believer:]

The index ETF P/Es on 1/26/09:

SPY: 10
IWM: 12
DIA: 10
QQQQ: 13

Let's see where they are in 2 weeks; if substantially higher it will indicate a reversion to the mean is likely, which could mean another leg down in stock prices is coming.

Jan 26 10:01 PM

[a believer:]

Sorry, I just read the footnotes and those index ETF P/Es were as of 12/31/08.

Jan 26 10:05 PM