ETF Talk: Hot Shorts and Cold Longs

Every quarter the Fabian team updates the performance of the existing exchange-traded funds (ETFs) and the most recent results are bleak. The latest findings through Sept. 30 indicate that the ETFs performing the best so far this year are shorting the equity markets. Also in positive territory are funds investing in U.S. government bonds. As subscribers of my paid services know, those have been two of my favorite strategies this year.

With the arrival of third-quarter performance numbers, my warnings about the dicey conditions in the equity markets have proven accurate. I’ll let the numbers tell the story. I encourage you to check out our latest ETF Update.

Before I go any further, I understand that these are anxious times for many of you with the market’s recent drops, including a plunge of more than 5% in the Dow Jones industrial average yesterday. Remember that if you have any questions about ETFs, please let me know and I’ll try to answer them for you in a future ETF Talk feature. If you have a question, please contact me by clicking here.

It has been difficult — but not impossible — to avoid deep losses so far this year. Listed below are two dozen ETFs that have been profitable in 2008. A number of them were unprofitable for parts of the year but they have absorbed the rough market conditions far better than the norm. You only have to glance at the list to see that the biggest winners in 2008 are shorting the markets. The ProShares UltraShort Semiconductor (SSG) ETF shined the brightest by rising 66.90% through the first nine months of the year.

As of 9/30/08

Our quarter-ending analysis found few sectors unscathed from the falling market. Dividend-paying equity ETFs, including financial stocks that typically pay dividends, took a pounding amid the ongoing credit crisis. The broad-based ETF categories that we reviewed featured: dividend payers; conservative growth; moderate growth; aggressive growth; actively managed; bonds; global; regional; international; country-specific; finance; health care; basic materials; energy; alternative energy; commodities; real estate; consumer/cyclical; technology; industrials; utilities; bear market; leveraged; and currency. So far this year, almost every sector is down by double-digit percentages. The pain clearly is widespread.

If you are reading this ETF Talk, you likely are among the investors who have suffered financial damage to your portfolios. Retirement funds, 401(k) accounts, personal investment accounts, trusts and education savings accounts all have shared in the barrage of bad results. Other than taking the risky approach of shorting stocks or the conservative path of buying government funds, there was no place else to escape the financial fallout except cash.

I encourage you to use the ETF Report that I developed to compare the performance of low-cost ETFs with your mutual funds. I will bet that your comparable mutual funds are down even further than the ETFs in the same categories.

As I have been advising subscribers of my investment newsletters and trading services, this year has been a time to stay defensive. However, markets that fall also ultimately rise. If you are young enough to ride out the bumps and maintain a long-term focus, you still can achieve your financial goals. Yes, it would have been great to make all of the correct moves with your money but not even the world’s best investors can meet that standard.

Watch for my next Quarterly Update of ETFs in January 2009 when the fourth quarter has wrapped up. I encourage you to look carefully at ETFs that fit into your investment plans and take advantage of their comparatively low cost structure. Sometimes it takes a crisis to spur us into action, and I’d say what we are experiencing now fits that description.