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Beginning with subprime concerns in 2007, the United States had to throw all kinds of spaghetti at the Wall before noodles began to stick. For instance, the Federal Reserve first slashed interest rates. Later, in March of 2008, the Fed and JP Morgan orchestrated a buy-out of Bear Stearns. In September, the SEC banned the short-selling of financial companies.

Still no spaghetti.

Big Government decided to try a different path by letting Lehmann go bankrupt. Was Bear Stearns too big to fail, while Lehmann brothers was not? “Big Gov” had exacerbated the uncertainty.

Congress passed TARP to buy toxic assets. Only problem was ... they didn’t buy toxic assets, but chose to purchase preferred shares of the financial institutions instead. More uncertainty. Eventually, the Fed ushered in the era of quantitative easing which allowed for the purchase of unwanted mortgage-backed securities. Eighteen bearish months passed before confidence returned.

Okay, so that wasn’t a top-notch historical review. Yet the point is the smartest people in the world struggled to instill confidence in the financial system circa 10/07-3/09. And while the sovereign debt crisis in Europe today may not be the same set of circumstances, dismissing the similarities outright may be detrimental.

Consider the extraordinary level of volatility in the past week. Granted, computerized program trading is worthy of some blame. Indeed, we can even chastise the “evil” hedge fund players and the insidious short-sellers.

On the other hand, the same thing could have been said about the volatility during the 2007-2009 bear. Was there no reality in the problems that existed at the time?

Some of the worst performing ETFs during the 2007-2009 bear included SPDR KBW Bank (NYSEARCA:KBE), iShares DJ Home Construction (NYSEARCA:ITB) and iShares Russell MicroCap (NYSEARCA:IWC). Subprime/Alt A mortgage exposure at financials companies decimated bank shares. Oversupply and negligible demand killed the homebuilders. And a deep recession rocked the smallest companies more so than the larger companies, as smaller companies had even less access to credit. In other words ... it wasn’t all due to market manipulation. (Even if market manipulation is 100% to blame, investors may not have the luxury of avoiding capital markets altogether.)

It follows that we may certainly attribute the ridiculous volatility to mechanized trading/opportunistic hedgies/”dark side” short-selling. However, there are genuine reasons for the selling pressure as well.

Here, then, are a list of ETFs that have taken the biggest hits. The names shouldn’t surprise you ... most of them represent the areas with the most exposure to the euro-zone debt disaster.

ETFs That Tanked Over The Previous 5 Trading Sessions
Approx %
iShares DJ Regional Banks (NYSEARCA:IAT) -9.5%
SPDR KBW Bank (KBE) -8.9%
SPDR Emerging Europe (NYSEARCA:GUR) -8.5%
iShares DJ Home Construction (ITB) -8.3%
Market Vectors Poland (NYSEARCA:PLND) -7.6%
iShares MSCI Turkey (NYSEARCA:TUR) -7.2%
iShares MSCI Austria (NYSEARCA:EWO) -5.1%
iShares MSCI Germany (NYSEARCA:EWG) -4.9%
SPDR S&P 500 (NYSEARCA:SPY) -1.6%

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Source: Without Bailing Out European Banks, These ETFs May Be Toxic