Topsy Turvy ETF World Looks All Shook Up

December 19, 2008

In recent weeks, long-duration ETFs focusing on Treasuries and high-quality corporates have been surging. 

With a week to go after the close of trading on Friday, the performance of exchange-traded funds in nightmarish markets promises to leave 2008 as one of the most unusual years on record.

Even if stocks rally in coming days, the Christmas break typically leads to sluggish volume. And it'll take a massive turnaround to usurp the ProShares UltraShort Semiconductor ETF (NYSE: SSG) from its lead as the year's top-performing ETF. 

Even with a total return of nearly 119% so far heading into Monday, SSG could be overtaken by second-place ProShares UltraShort Russell MidCap Growth ETF (NYSE: SDK). But it would take an enormous rally, though—SDK is up almost 105%. 

Following closely behind are three other ProShares ultra funds. 

"If the rest of the market has its way, this year will prove to be a flash in the pan. Few long-term-oriented investors are served by short-bias strategies. But it sure has looked smart recently," said Jeff Tjornehoj, a Lipper analyst. 

The research firm compiles indexes composed of funds for 65 different equity and fixed-income categories. The top performer through Thursday was the Lipper Intermediate U.S. Government Index, which was up 9.9% in 2008. By contrast, an index of longer-term U.S. government bond funds—including agencies as well as Treasuries—had gained 6.09% on the year. 

At the same time, the Lipper short-term government bond funds index was up 3.28%. 

All of the firm's equity indexes were negative. The worst performer was the Lipper Emerging Markets Funds Index, down 54.3% on the year. 

Lipper doesn't benchmark bear market funds performance. 

An Urge To Surge... 

In recent weeks, long-duration ETFs focusing on Treasuries and high-quality corporates have been surging. The Vanguard Extended Duration Treasury Index ETF (NYSE: EDV), for example, is No. 11 in terms of top performers on the year, according to Morningstar data.

In fact, the top 10 are all non-UltraShort ProShares. In the top 20, EDV is the long non-shorting ETF. 

The only other type of fund to crack the shorts' grip this year has been the CurrencyShares Japanese Yen Trust ETF (NYSE: FXY). That heads into the final week of the year at No. 33 with a better-than 24% return. 

But following close behind is the PowerShares 1-30 Year Laddered Treasury ETF (NYSE: PLW). Also with gains of 20%-plus are the iShares Barclays 10-20 Year Treasury Bond (NYSE: TLH). The iShares Barclays 7-10 Year Treasury Bond (NYSE: IEF) has also been hovering around 20% in recent weeks.  

"The reason why bond ETFs of higher quality have been doing better is very simple—a flight to quality," said Jim Colby, senior municipal strategist for fixed-income at Van Eck Global.

But within the past few weeks, he adds, longer-duration bond funds have found particularly smooth sailing. "We've hit a pretty dramatic period in the past two weeks of falling yields and rising prices with long-term bond ETFs holding the highest-quality issues," said Colby. 

He credits that to an announcement by Federal Reserve Chairman Ben Bernanke that it will start directly buying bonds to help drive liquidity in frozen credit markets. 

Traders are speculating that long Treasuries will be the prime target of the Fed's purchases, says Colby.

How big of a year-end boost is that providing for longer-term bond funds? For example, 30-year Treasury notes were yielding 2.55% on Friday. That compared to 3.43% at the end of November, equal to about a 20-point surge in long-bond prices, says Colby. 

"That's a huge move in the world of bonds," he added. 

-- This article was submitted by IndexUniverse Managing Editor Murray Coleman. 

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