Work the Plan with These 11 ETFs

08/22/2011 8:30 am EST

Focus: ETFS

Ron Rowland

Editor, All Star Fund Trader

In a volatile market, it’s important to stay calm and stick to your long-term strategy, writes Ron Rowland of All-Star Fund Trader.

We began last week considering five numbers: -6.7%, +4.7%, -4.4%, +4.6%, +0.5%.

These are not annual, monthly, or even weekly returns. They are the daily changes in the S&P 500 index during the week of August 8-12.

String them together, and the net was a disappointing but tolerable -1.7%. Investors clearly expected much more (or much less) earlier in the week.

Unusual volatility is most often the result of unusual and/or unexpected events. What was so unexpected? We do not believe the S&P downgrade of US long-term Treasury paper is to blame.

Everyone already knew that the US government was deep in debt and politically paralyzed. Nor do we think many traders were surprised by the Fed’s announcement it will keep short-term rates near zero until mid-2013. So why the wild swings?

The answer, we suspect, lies in the European debt crisis. The idea that a monetary union can co-exist with political independence has reached the end of its lifespan. Either the euro will unravel, or the continent must agree on common fiscal policies.

Neither prospect is very appealing, and either will have a global economic impact.

Whatever the reason, global equity markets lost $6.8 trillion in value from July 26 through August 12. Impatient investors fled equity funds at the fastest clip since the 2008 financial crisis. Few stopped to draw distinctions between US, global, developed, or emerging markets; anything stock-based was deemed less valuable than gold or cash.

Long-term investment success is the result of:

  • having a well-designed strategy
  • disciplined implementation of it.

A strategy that is abandoned when the road gets bumpy was never really a strategy in the first place. Time will tell whether buying or selling is the better decision right now.

Doing nothing is also a decision—and can sometimes be the best option.

Funds to Watch
As you might expect, the large amount of daily volatility in the broad market averages produced even more volatility in narrower market segments. By the end of the week, there was significant skew across industries, styles, and geographies.

The worst performing sector was financials, with banking getting hit especially hard. SPDR KBW Regional Banking ETF (KRE) plunged another 9.9%, and is now off more than 23% over the past four months. iShares DJ US Home Construction (ITB) shed 8.4% for the week and is off 33% since early January.

The largest losses among the style-based ETFs included Rydex S&P SmallCap 600 Pure Value (RZV) and PowerShares Zacks Micro Cap (PZI), both dropping more than 5%.

For international ETFs, iShares MSCI Russia Capped (ERUS) erased 10.7% of its value, and iShares MSCI South Korea (EWY) lost 7.1%.

On the other hand, winners included:

  • Market Vectors Gold Miners (GDX), up 6.9%;
  • SPDR Wells Fargo Preferred Stock (PSK), which rose 1.6%;
  • Global X FTSE Colombia 20 (GX), which gained 3.2%.
  • JPMorgan Alerian MLP Index ETN (AMJ), up 3.4%;
  • and SPDR Gold (GLD), a 5% gainer.

The first four days of last week saw massive volume, while Friday was "back to normal." Volatility comes in clusters, and there is no evidence that the current cluster has run its course. All remain buys.

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