Six ETF Stories from the First Half of '09

With a roller coaster six months behind us that saw no shortage of interesting twists and turns and unsuspected headlines, we’ve finally reached the midway point of 2009.

Ahead of us is the highly anticipated “second half of 2009,” which for months we’ve heard will hold returns to growth, a recovering economy, and enough green shoots feed a revolution (possibly the one taking shape in the streets of Iran?).

When looking graphically at the market’s performance over the last two quarters, I felt like I was going through a sloppy to-do list. Everything looks like a squiggly checkmark, with a sharp decline in the beginning of the year followed by a longer upslope, bringing us right about back to where we started.

But not all ETFs followed this pattern. Here’s a look at six groups of ETFs that distinguished themselves in the first half of 2009:

1. It’s G-O-O-D to be a B-R-I-C

Brazil, Russia, India, and China, the group of nations bound together more by their tremendous economic potential than their geographic proximity, have experienced strong growth in the first half of the year, boosted by strong commodity prices and early indications of quick recoveries. As of June 30, five ETFs focusing on BRIC nations were among the top ten overall equity ETF performers.

2. Gold Still a Hot Commodity

Despite widespread belief that the recession finally hit bottom in March and a general increase in optimism regarding prospects for the global economy, gold, a traditional safe bet in times of economic uncertainty, remained in high demand throughout the first six months of 2009.

Gold prices have also been propped up by concerns of increased inflation rates resulting from many developed nations opting to spend their way out of the recession. Some investors are now betting on runaway inflation seizing developed economies, fearing we could see rates reach into the double digits. The SPDR Gold Trust (GLD) was up about 6.4% in the first half.

3. Actually, All Commodities Are Hot!

Driven partially by hopes of increased production and industrial activity in the second half of the year, prices of most commodities have risen sharply so far in 2009. A few of the many commodity funds up over 20% through the first half of the year (excluding leveraged funds):

In particular, metals ETNs, spurred by hopes of increased demand from China and other manufacturing-intensive countries, have delivered strong returns in 2009. But not all commodity prices have been reaching skyward. Natural gas ETFs, such as GAZ (down 41.1%) and UNG (down 38.7%) have been crushed this year, due in large part to full inventories and low capacity utilization ratios at factories and mills.

4. Volatility Comes Back To Earth

At the end of 2008, it seemed as if the triple digit swings in the Dow were an everyday occurance, with investors hardly blinking an eye if the major indexes moved 2% or 3% in a single session. It seems, however, that 2009 has ushered in some degree of stability. After reaching record levels, most indicators of market volatility have reutned to a normal historical range. iPath’s S&P 500 VIX Short Term Futures ETN (VXX), which tracks the CBOE’s VIX Index, is down nearly 30% since its launch in February.

5. Real Estate: U.S. Lagging Far Behind

Despite signs the worst may be behind us, U.S. real estate ETFs are yet to mount a serious recovery, adding to already steep losses in the first half of the year. Even as home prices are finally beginning to stabilize in many key markets, most REIT ETFs have continued their downward trends.

The reason? While residential real estate is a component of many publicly-traded REITs, these funds are dominated by commercial real estate, the performance of which often lags the residential market. Many analysts believe that commercial real estate will be the next shoe to drop, fearing that vacancy rates will skyrocket as firms that have made massive layoffs seek to downsize their lease expenses.

Outside the U.S., real estate markets are showing signs of life, particularly in Asia where demand remains high. A quick look at the start differences in performance between U.S. and global real estate ETFs in the first half of the year:

6. U.S. Dollar Under Pressure

In order to fund more than $700 billion worth of stimulus packages, the debts of the U.S. government have swelled to record levels in 2009. In addition, Russia and other emerging nations have harped on the need to reform the global currency reserve system, expressing their belief that the U.S. dollar should be replaced as the world’s key currency and dominant currency for trade settlement.

Although the dollar has been defended by China (the world’s largest holder of Treasuries and more recently by Japan, these developments have caused many to speculate that the dollar would come under pressure in 2009. Through the first six months, the U.S. dollar has slumped against most of its major rivals, with only Japan depreciating relative to the greenback:

Disclosure: Long VNQ.