Third Time's Anything But a Charm for Developed Market ETF Losses

Two weeks ago, I expressed an idea that we had entered a summertime slumber. (Review 6/17/09's "Anatomy of A B--- Market Rally In U.S. ETFs, In Foreign ETFs.")

The premise was simple. A cyclical uptrend required more than the absence of bad news to move substantially higher. Yet a continuation of bear market hopelessness wouldn't occur with trillions of investor dollars looking to dribble into bargain opportunities. Hence, we'd probably trade sideways.

At the time, I noted that we had moved 8 weeks up and 6 weeks sideways. Now it is 8 weeks up and 8 weeks sideways. In fact, all of the explosive recovery gains for stock assets came in March-April, while the market has tread water throughout May-June.

Yet there's a disturbing trend for the naysayers. Specifically, major benchmark ETFs for developed markets have closed lower each week for 3 consecutive weeks. Here are the numbers:

3rd Consecutive "Unlucky" Week For Major ETF Benchmarks (Through 7/2/09)
				6/15-6/19	6/22/-6/26	6/29-7/2	3-Week Cum Loss
S&P 500 SPDR Trust (SPY)				-2.6%	-0.2%	-2.2%	-5.0%
iShares MSCI EAFE Index (EFA)				-3.1%	0.0%	-1.6%	-4.6%
iShares MSCI Emerging Markets (EEM)				-5.9%	2.6%	-1.2%	-4.6%

Perhaps what is most disturbing about the trend is that the so-called lower risk investments -- developed market stocks -- have dropped more over the last 3 weeks than emerging market counterparts. Why invest more in the "perceived" safety of the U.S, Europe or Japan, when China, Latin America and Southeast Asia aren't falling deeper? (We all know which is going up faster!)

There are ways to mitigate the dangers of investing in emerging markets. One can use stop-losses. One can also employ diversification with low-correlating assets. (Re-read "The 5 Best Diversifiers For Reducing Emerging Market Risk!")

Frankly, if you're going to look to U.S. stocks for a portion of your portfolio, you may wish to go after a reliable income component. And you may even wish to exclude financial stocks from your dividend pursuit.

Energy MLPs are a solid first step... Magellan Midstream (MMP), Kinder Morgan (KMR). A fund investor might consider the Alerian MLP Index ETN (AMJ).