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With the S&P500 cratering (uh-oh, we hit the dreaded Hindenurg Omen) and investors flooding to the (percieved) safety of Treasuries in droves, the thing that differentiates this market from the carnage of 2008 and 2009 is that there IS now some decent delinking of asset classes. During the 2008-2009 crash, ALL asset classes but Treasuries were selling off simultaneously as investors were dumping everything liquid to free up cash. This time around though, there’s been a steady exodus from US equities into not only bonds, while gold is holding its value. And there are some sectors that are actually running.

So, here’s a look at the Top 20 ETFs in 2010 YTD:

1. GXG Global X/InterBolsa FTSE Colombia 20 ETF 39.5%
2. ZROZ PIMCO 25+ Yr Zero Cpn U.S. Trsy Idx ETF 35.4%
3. IIH Internet Infrastructure HOLDRs 29.1%
4. THD iShares MSCI Thailand Invest Mkt Index 27.8%
5. ECH iShares MSCI Chile Investable Mkt Idx 24.1%
6. IDX Market Vectors Indonesia Index ETF 24.1%
7. VXZ iPath S&P 500 VIX Mid-Term Futures ETN 21.9%
8. EWM iShares MSCI Malaysia Index 21.5%
9. JJT iPath DJ-UBS Tin TR Sub-Idx ETN 20.3%
10. JO iPath DJ-UBS Coffee TR Sub-Idx ETN 18.4%
11. AMJ JPMorgan Alerian MLP Index ETN 17.3%
12. FRN Claymore/BNY Mellon Frontier Markets 14.4%
13. PCY PowerShares Emerging Mkts Sovereign Debt 14.1%
14. PGF PowerShares Financial Preferred 14.0%
15. EMB iShares JPMorgan USD Emerg Markets Bond 13.0%
16. ICF iShares Cohen & Steers Realty Majors 13.0%
17. PFF iShares S&P U.S. Preferred Stock Index 12.8%
18. GLD SPDR Gold Shares 12.2%
19. FRI First Trust S&P REIT Idx 11.7%
20. TUR iShares MSCI Turkey Invest Mkt Index 11.6%

I intentionally excluded leveraged ETFs since they distort the true nature of the performance of the underlying asset class, and they also aren’t reliable performers long term. I also sought to avoid redundant sector and country ETFs. Finally, I excluded short ETFs since that play can only last so long; the general trend must always be up over a long enough period of time. Some exchange traded notes were included since there’s no ETF to cover the commodity or category. Note some of the themes.

  • Emerging Markets – It’s been refreshing to see emerging markets demonstrate the ability to rally even as the US market declines. With the S&P500 down 5% on the year, these markets are rallying. However, noticeably absent are the traditional BRIC economies; it’s the newer set of players, the Frontier players, if you will, like Colombia, Chile, Thailand, Malaysia and other smaller countries that are growing while China, India and Russia struggle with issues as they mature.
  • Metals – The metals theme is interesting in that industrial production and residential building is exactly going gangbusters, but coming off such a low base from last year’s collapse, there was room to run this year. There are also continued fears of inflation and currency devaluation, even though many indicators are pointing toward deflation. Gold [GLD], being the most prominent arbiter of future inflation expectations, is actually up a healthy 12% on the year.
  • The Internet – What differentiates the recent crash from the internet bubble is that now these tech and internet indices are comprised of companies that actually have real business models, real business utility, real profits. These companies are actually benefiting tremendously from the economic downturn because corporations are increasingly turning toward automation and the web to improve productivity while slashing headcount. There does not appear to be any onus to reverse course in the face of burdensome healthcare reform and continued uncertainty in the market.
  • Bonds/High Yield – With the specter of a new bubble forming, investors are bidding bond prices up to record levels. The US Treasury market is beginning to look alarmingly frothy, but there are also some sovereign debt funds that are doing well, especially in the emerging markets. Another breed of bond-type instruments are doing quite well also – the Preferred Stock ETFs – a hybrid between stocks and bonds. With the survival of the large financials more clearly intact coming out of the crash, these vehicles have been providing a nice combination of high yield and capital appreciation for some time now. A new play that just launched Wednesday also includes the new Alerian MLP ETF. While an MLP ETN made the list, I prefer this new ETF over the ETN since there’s no bank solvency risk on the note and there are also no messy K-1 tax forms that you get with individual partnerships.
  • Real Estate – While Tuesday’s housing data seemed alarming, what was missed in the headline was that most of the decline was in the low end of the market and the higher priced homes sales weren’t as nearly as bad. Additionally, Real Estate Investment Trusts have been steady performers throughout the year, delivering outsized yields and remaining solvent. Coming off a major dip in 2009, some of the top funds this year include these real estate names.

Disclosure: As of the time of publication, the author is long PFF, GXG and GLD.

Source: Top 20 ETFs in a Down Market