Fundamentally Tested

May 01, 2007

The sharp market downturn from February 26 to March 5 provided a microtest of how the seemingly endless array of fundamentally weighted, timeliness-seeking, dividend-focused and other specialty exchange-traded funds (ETFs) would perform under fire.

The verdict? Mixed. Journal of Indexes senior editor Matt Hougan examined the performance of 35 ETFs over the sample time period in an article for His study showed that more than half of the "index-beating" ETFs managed to outperform the S&P 500 over the down stretch.

Most of the equity-based ETFs beat or lost to the index by less than 1 percent. The best performers by far were the traditional diversifying asset classes: bonds and commodities. The iShares Lehman Aggregate Bond ETF (NYSE: AGG), for instance, beat the S&P 500 by more than 5 percent over the two-week stretch.

Different equity portfolios will perform differently, and there may be a relative performance benefit to one indexing approach versus another: WisdomTree, for instance, said that each of its funds (save Japan) outperformed its benchmark during the downturn.

Ultimately, however, the truth is this: If you really want protection from a broad equity market turndown, don't buy equities; buy bonds, and maybe commodities.

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