3 ETFs That Beat Back the Bearish Downturn

Back on 10/9/07, the S&P 500 hit 1565. That was the last time that investors had been rewarded for overall market risk.

The S&P 500 closed down in October, November and December; the sell-off seemed to have hit a so-called "bottom" in January, when the Federal Reserve jumped in with aggressive rate cuts. Intra-day S&P 1270 marked the first time that a "low" had been reached.

Many thought we had escaped by the skin of our chins. Many believed that the "Bernanke put" was in, and that more rate cuts could avert additional disaster.

Yet lower rates weren't enough. Consumers and businesses had no access to cash. Worse yet, financial institutions weren't able to raise or borrow money.

By March, the market set yet another "bottom" with a Fed-orchestrated bailout of Bear Stearns. S&P 1256 marked a new "low," representing a bearish 19.7% top-to-bottom decline.

After a pretty solid run towards S&P 1420 in April and May, the markets have taken a fairly significant turn for the worse. Again! Even with hopes that a recession will be avoided, we're now seeing new fears of 70s-style stagflation. (Here is my April 30 commentary on investing in a slow-growth, "stagflationary" environ.)

The main problem has been an old nemesis... OIL. It was supposed to be a problem at $50 per barrel. Certainly, consumers and businesses would struggle at $75... no? What about $100? Even $100 seemed little more than a psychological barrier.

But now, we've found the point of questionable risk-reward return; that is, $135 per barrel and $4 gasoline at the US pumps is too painful. It's sending shock waves down the market's spine. And S&P 1420 has quickly deteriorated to S&P 1335.

For 8 months, most portfolios have seen more risk than reward. Granted, energy stocks and underlying commodities have been super profitable. Yet it is rarely sensible to put all of one's eggs in a single basket or volatile sector.

Bear busting ETFs? They're not necessarily the ones that have had the best 8-month returns; rather, the best bear busters are those that have helped a balanced portfolio weather the assault.

Here, then, is a "Top 3" list:

1. The Dow Jones Total Commodity Index (DJP). Clearly, a 31% return from 10/9/07 to 6/8/08 is telling all its own. Yet the reason that I have been using DJP for so long has been its exposure to the overall asset class. Livestock, wheat, ag, crude, nat gas, precious metals, steel, silver -- single commodity bets can be far riskier. (Read my June 07 column on "Investing In a Sideways Market" or my September 07 feature, "Total Commodity ETN: Low Correlation, High Sleep Factor.")

2. The SPDR International Treasury Fund (BWX). Foreign bonds are one of the few asset classes that have demonstrate a slight negative correlation to U.S. stocks. So while the S&P 500 Trust (SPY) has dropped a -14% bomb over the 8-month downturn, the treasuries of developed foreign countries have quietly produced 9%. Even with the European Union talking tough on inflation, BWX stands to gain if a projected European slowdown inspires a round of rate cuts.

3. Wisdom Tree Emerging Market High Yield (DEM). The first thing one thinks about emerging markets is, typically, extremely high risk with the potential for extremely potent rewards. Yet this high-yielding dividend fund has defied preconceived beliefs. It has actually been less volatile than the S&P 500 SPDR Trust (SPY) or the MSCI EAFE Index (EFA). And while a 0% return may not seem like much... it has been plenty powerful in the rough-n-tumble 10/9/07-6/8/08 time frame. (Read "WisdomTree's DEM makes a Compelling Argument.")

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Bear Stocks...:]

Virtually all of our top ranked ETFs are commodity plays. These include DBE, OIL, DBC, GSP and XME. If you prefer individual stocks, the best bets now include REXX, MOS, AGU, POT and EAC. In the mood for short-selling in this manic market? Check out CTX, JPM, CAL, WFC and REGN. Visit our website for more info.

2008 Jun 12 09:10 AM

[Richard Dwyer:]

Good information! Don't forget about Ultrashort ETFs which have been thriving by shorting bearish sectors. Readers might want to consider SRS (which shorts real estate) and the SKF (which shorts financials).

2008 Jun 12 09:18 AM

[CLH:]

finance.yahoo.com/q/bc...

SKF has done well over the last year while SRS the short real estate has done nothing. I have been long real estate since March.

Its time to switch into stocks that have been down for the year. Commodities are over priced as is oil. Always buy stocks with the upside not those which are over priced. Commodities have going up for 5 years. As growth slows fewer commodities will be needed --demand down.

2008 Jun 12 02:28 PM