How to Invest in Single-Country ETFs

Exchange traded funds (ETFs) that track a single country have have been a boon to many long-term investors. They allow investors to reduce their exposure to specific regional disruptions, such as the recent credit crunch, and they up the exposure available to countries that are profiting more than the United States or other distressed nations.

Global growth has been outpacing that of the United States' for some time now. Evidence of this can be seen just by looking at the performance of the S&P 500: year-to-date, it's down 5%. Its five-year average return is 10.6%, and the ten-year average is 3.9%.

Investors can't be blamed for considering looking abroad for places to put their money. Single-country funds offer more flexibility than mainstream equities, says Alan Farley for The Street.

Overnight gaps that can occur in single-country ETFs can subject them to volatility.

iShares MSCI Mexico (EWW) is an example, as it fell nearly 3% on April 25 because of weak earnings from America Movil (AMX). However, over the past decade, EWW has benefited from Mexico's steady growth in the last decade. Year-to-date, the fund is up 3.6%.

Other ETFs with a strong year-to-date performance include iShares MSCI Brazil (EWZ), which is up 12% and has an annualized return of 55.4% over the last five years;  iShares MSCI Taiwan Index (EWT), up 10.2% so far this year, with an annualized return of 18.6% over the last five years.

Brazil was upgraded yesterday by Standard & Poor's to "investment grade."

These uptrends over time with single-country ETFs are all well and good (hindsight is 20/20, right?), but what if you had bought Brazil in November and sold it in January? You would have been down 50%.

But each single country needs to be evaluated on its own merits. Not all of them are going to go up. When it comes to these funds, educate yourself and monitor the trends closely. Have your sell points set for each, letting it go when it either drops below its 200-day moving average or 8% off its high.

If you stick to the plan, hopefully you will achieve your goal of doing well on the uptrends while avoiding the volatility that occurs from time to time.

Blue Chip ETFs or Not, Stick to the Strategy

According to some, opportunity is knocking for blue-chip stocks and the exchange traded funds (ETFs) that count them as components.

The S&P is around 14% undervalued right now, according to Morningstar Analyst Jeffry Ptak. Broader indexes and "blue-chippy" stocks are where the excitement may be at, reports Chuck Jaffe for MarketWatch. Ptak feels that investors could feel more comfortable going after broad indexes instead of focusing on thin, volatile bits of the market.

Whatever your feeling, when you make investment decisions, stick to a plan such as using the 200-day moving average. If short-term is more your style, look at the 50-day moving average and sell when it drops below or 8% off its high.

Blue-chip opportunities:

• Dow Diamonds (DIA)
• SPDRs (SPY)
• Rydex Russell Top 50 (XLG)

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

PowerShares Launches Its Actively Managed ETF Line

The long-awaited actively managed exchange traded funds (ETFs) from Invesco PowerShares are here. They're billed as the industry's first three actively managed equity ETFs, and they began trading on the NYSE Arca today.

All of the funds' holdings are to be disclosed daily on the fund's website. They are:

• PowerShares Active Low Duration Fund (PLK): Invests in a portfolio of U.S. government, corporate and agency debt securities. It seeks to outperform the Lehman Brothers 1-3 Year U.S. Treasury Index. The unitary fee will be 0.29%.
• PowerShares Active Mega Cap Fund (PMA): Invests primarily in the equity securities of mega-caps. It seeks to outperform the Russell Top 200 Index. The unitary fee will be 0.75%.
• PowerShares Active AlphaQ Fund (PQY): Invests in a portfolio of about 50 securities listed on the Nasdaq Global Market. It seeks to outperform the Nasdaq 100 Index, and the unitary fee will be 0.75%.
• PowerShares Active Alpha Multi-Cap Fund (PQZ): Invests in about 50 securities selected according to a methodology developed by AER advisors. It seeks to outperform the S&P 500. Its unitary fee will be 0.75%.

The unitary fee is the one fee used to cover expenses incurred in connection with managing the portfolio.

Bear Stearns launched the first actively managed ETF in late March, Bear Stearns Current Yield Fund (YYY).

GE Earnings Reports Don't Bring Markets and ETFs To Life

General Electric (GE) reported disappointing profits today, dimming stocks and exchange traded funds (ETFs).

The reading was weaker than expected, reports Tim Paradis for the Associated Press. The report sent the markets south, as the company its hands in a wide range of pots: entertainment, finance, health care and more. GE also lowered its projections for the entire year.

The report has analysts worried that other companies are gearing up to paint a similarly gloomy picture.

GE is 2.2% of assets in the Diamonds Trust, Series 1 (DIA). The company is one of the original components of the Dow Jones industrial average.

It's also 19.4% of iShares Dow Jones US Industrial (IYJ), which was down nearly 4% midday. GE is the second-largest holding (2.9%) of the SPDRs (SPY), down 2% midday.

Feeling Bearish or Bullish? There's An ETF For Every Mood

Last week's stock surge has caused a pullback for some of the leveraged and inverse exchange traded funds (ETFs), the same funds that were earning traders so much money.

David Penn for Trading Markets explains that one of the biggest benefits of a leveraged ETF is that traders do not have to use a margin and still get a 2-for-1 bang for their buck.

Another benefit of a leveraged ETF is that traders can bet against a market without having to sell stocks or ETFs short. Inverse ETF trading is much more simple than taking a bearish position on a sector.

ProShares and Rydex are the primary providers of an extensive line of short and leveraged ETFs.

Take a look at these long/short ETFs that are appearing on investors' radar:

• ProShares UltraShort S&P 500 Fund (SDS)
• ProShares UltraShort QQQ Fund (QID)
• ProShares UltraCap Mid-Cap 400 Fund (MZZ)
• Rydex Inverse 2x S&P 500 (RSW)
• ProShares Ultra S&P (SSO)
• Rydex Inverse 2x Russell 2000 (RRZ)

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

ETFs, Stocks Sigh As the S&P Parties (Or Not) Like It's 1999

It's a historical fact: there are the periodic stretches of market declines that affect stocks and exchange traded funds (ETFs) amid the years of steady upward climb.

Every so often, the ground made up in those climbs is lost, which is the case now. The S&P 500 is currently trading at the same level it was in April 1999, reports E.S. Browning for the Wall Street Journal.

Up until last fall, the tech bubble was viewed as a short-term setback. But over the past nine years, the S&P 500 has been the worst performing of nine different investment vehicles tracked by Morningstar.

The biggest question is how low can investor confidence go? Many analysts are foreseeing the global economy to stay on track. Finance professor Jeremy Siegel says that although the S&P has been inconsistent since its worst years in 2000 through 2002, the bad times are largely past.

There are other signs that things won't be so bad this time around: for one, inflation is far below the double-digital rates seen in the 1970s.

Investors will likely remain nervous and pessimistic for awhile, though, but one analyst says there's no reason to be as pessimistic as people were during the Great Depression.

Where do we go from here? Two problems need to be solved before the bull can storm the markets once again: stocks need to recover from the hangover of the high prices of the late 1990s and the continuing effects of the low interest rates instituted by the Federal Reserve in 2001 and again today. Those low rates bumped up corporate profits, but set off borrowing excesses.

Graphic courtesy of the Wall Street Journal.

Leveraged ETFs Can Help You Keep Earning, But Don't Come Up Short

Investors are increasingly less content do just sit there holding cash while the market tumbles, giving short exchange traded funds (ETFs) a measure of popularity. The trend has been especially popular this year as each week seems to bring only more bad news. There's no telling when things will turn around, say investors, so why not turn lemons into lemonade?

ProShares is a leading provider of the short fun. The firm has seen more than $4 billion flow into its offerings this year, one of the largest tallies in the industry, reports Rob Wherry of Smart Money.

As the next few weeks are anticipated to be rough ones for Wall Street, some investors are taking advantage of these vehicles to keep their balances from shrinking. While many want to try and take advantage of these funds for the current market conditions, use them with caution. The risks when there's a turnaround are great.

A few of the short ETFs available are:

• ProShares UltraShort S&P 500 (SDS): up 22% this year. This strategy can help offset risk, keep taxes to a minimum, and protect principal.
• MacroShares Oil Up (UCR): up 55%; may be used as a tax hedge.
• ProShares Short QQQ (PSQ): up 18.8% year-to-date; posts the inverse return on the Nasdaq's 100 largest non-financial stocks.

Clean Energy ETFs Falter; Green Investing on Hold

While clean energy exchange traded funds (ETFs) may have gotten socked hard in the recent market correction, it doesn't mean the fad is over. Most sectors are taking a hit these days, and alternative energy is no exception.

The clean energy sector got ahead of itself, green advocates say. Last year, for example, WilderHill Clean Energy Global Innovation Index was up 58% while the S&P 500 gained 3.5%.

In January's sell-off, the S&P was down 6% while the WilderHill index was down 20%, says Dan Jamieson for InvestmentNews.

Robert Wilder, the founder of WilderShares LLC and manager of the indexes, says areas such as solar power may have been bid up. They rose a whopping 163% last year.

One analyst says that people will support clean energy until the cost goes up too much, and that the promise of the sector is more talk than reality at this point.

Despite the sell-off alternative energy practices will not go by the wayside, even if oil prices fall. New energy technologies will be driven by the need to preserve the environment and energy security and it's the beginning of a trend. The way power is produced is undergoing a transformation.

If you're ready to think about green ETFs, here are a few to look at:

• First Trust NASDAQ Clean Edge US Liquid (QCLN), down 33.6% year-to-date
• PowerShares Cleantech Portfolio (PZD), down 15.2% year-to-date
• PowerShares WilderHill Clean Energy Portfolio (PBD), down 21.6% year-to-date
• Market Vectors Global Alternative Energy (GEX), down 25.6% year-to-date

Just bear in mind, green ETFs have been popular, but when it comes down to it, investors are going to look at them like they've been looking at other investments lately.

Options Trading With ETFs Gets Popular In Wacky Markets

Options trading with exchange traded funds(ETFs) has been surging lately, with the most recent spike taking place last month.

It appears people were getting defensive, according to Joe Cusick, market analyst for optionsXpress.

Options are different from simply buying a stock or ETF: they're used to bet on the direction of an ETF or stock's price. There are two types: calls and puts. When you buy a call option, you have the right to buy a stock at the "strike price" before the option's expiration. When you buy a put option, you have the right to sell a stock at the strike price.

Murray Coleman for Seeking Alpha says that the market volatility could be the reason options are suddenly gaining in popularity. They can be a way to hedge your bets against wild swings.

Not all ETFs are a big portion of options trading, and just three ETFs in particular have made up the bulk of the activity:

• The iShares Russell 2000 Index Fund (IWM) has averaged 395,383 daily options volume, a 97% increase from the same period a year ago.
• PowerShares QQQ (QQQQ) averaged 268,000 in options trading per day, up 61% compared with the same time last year.
• SPDRs (SPY) averaged 337,000 daily options trades, up 242%.

ETFs and Index Funds Are Growing Like Weeds

Exchange traded fund (ETF) usage was recently explored by the Advisor Perspectives Universe.

The data, gathered on Feb. 28, was interesting:

• ETFs now hold twice the assets of index funds (70.3% vs. 29.7%).  ETF assets increased from 65.0% to 70.3% over the prior five months.            
  

• ETFs and Index Funds now represent 32.9% of total mutual fund assets, up from 29% on Sept. 30, 2007 and 27% on June 30, 2007.

• ETFs and Index Funds now represent 6.4% of total marketable securities in the AP Universe, up from 4.6% on Sept. 30, 2007 and 3.9% on June 30, 2007.

• Holdings tied to broad-based indexes increased, but still represent a relatively small portion of overall assets in the AP Universe. Holdings tied to the S&P 500 increased from 17.3% to 24.5% of total mutual fund assets from Sept. 30, 2007 to Feb. 28. Holdings tied to the EFA increased from 17.5% to 20.4% over the same time period. Holdings tied to the total market decreased slightly, from 4.5% to 4.3%.

• Holdings in sector-based ETFs decreased consistently from Sept. 30, 2007 to Feb. 28 (as a percentage of mutual fund assets) and continue to remain a small percentage of ETF holdings.

For more interesting numbers and insight, check out the tables on the site.

Stocks and ETFs Suffer as Indexes Hit 52-Week Lows

The traumatic credit market and increase in home foreclosures are touching down on all areas of the market, including exchange traded funds (ETFs).

Joe Bel Bruno for Associated Press reports that the Dow Jones Industrial dropped 214 points in trading today. The S&P 500 lost 2.20%, while the Nasdaq composite declined 2.30%. The declines sent both the Nasdaq and S&P to 52-week lows.

Credit concerns mounted after Thornburg Mortgage Inc. and Carlyle Group bond fund revealed troubles with investment backed mortgages. The entities failed to make margin calls, which are payments that guarantee much larger debt or investments.

Fourth quarter home foreclosures rose to record levels. Rising defaults have caused lenders to be weary to extend credit, resulting in abnormal credit markets.

New ETFs Take Innovative Approach To S&P

A trio of new exchange traded funds (ETFs) launched on Friday, taking a different twist on the Standard & Poor's benchmarks.

They will use the same stocks as the S&P but the ETF will weight names by revenue rather than market-cap sizes, reports  Murray Coleman for Index Universe. Sean O'Hara, president of RevenueShares Investor Services, says that weighting by revenue was the most efficient way to keep the S&P benchmarks' lineup the same while providing different patterns of return.

Some analysts don't like the price so far: 0.49% in annual fees. O'Hara says that the returns based on back-tested data still would have been better than the S&P 500's average annualized 11.4% between 1991-2007.

The new underlying indexes were created so investors wouldn't fall prey to security selection bias. The new ETFs are:

• RevenueShares Large-Cap Fund (RWL): Aims to take the best of the S&P 500
• RevenueShares Mid-Cap Fund (RWK): Designed to complement the S&P 400
• RevenueShares Small-Cap Fund (RWJ): Replicates S&P 600

Canada's ETF Gives Exposure to Natural Resources and More

Canada is a developed country that offers commodities exposure without all the geopolitical risk, making its exchange traded fund (ETF) that much more enticing.

As a commodities play, iShares MSCI Canada ETF (EWC) has the types of gains available from developed markets, and as a North American counterpart, safety is an added plus, reports Don Dion for Seeking Alpha.

Over the past five years, EWC has returned three-and-a-half times more than the S&P 500.

The fund doesn't just have commodities: it also has allocations in energy and materials. It also gives U.S. investors a play on the country's currency, as well as banks, technology companies and other firms that have held up well in our own downturn.

Just Two ETFs Can Give You Diversification

These days, the investment world is all about diversification to minimize risk, and exchange traded funds (ETFs) can help you get the necessary exposure. ETFs are a great diversification tool that can help buy-and-hold types and active traders alike. 

Matt Kranz for USA Today questions why someone would own two stocks when they could own two ETFs instead. We have to agree with that one. Owning more stocks, rather than fewer, is a benefit because you can reduce your portfolio's overall risk and your exposure to possible problems with just one or two companies.

If you're more domestic-minded, you can start with the S&P 500, and the S&P 500 (SPY). It has relatively low risk and a broad base. For bonds, there are large baskets put together by iShares with the Lehman Aggregate Fund (AGG) or the Vanguard Total Bond Market (BND). For broad global exposure, there's the Vanguard FTSE All-World ex-US ETF(VEU) gives broad global exposure.

By keeping your mix more diversified, you lower your risk and increase your expected returns. Getting and staying diversified with ETFs is easy.

UltraShort S&P ETF Doubles Up in Downward Trend

Short exchange traded funds (ETFs) are meant to head up as the market heads south - something it seems to have been doing a lot of lately.

The ProShares UltraShort S&P 500 (SDS) and Rydex Inverse 2x S&P 500 ETF are (RSW) no exception, especially as they are designed to deliver twice the opposite performance of its underlying index. The S&P has had some upswings in the last several months, but overall, it's on a downward trend:

• In the last month, it's lost 1.7%
• Over three months, it's down 7.5%
• Year-to-date, it has lost 8.1%

Mike Paulenoff at MPTrader predicts that the SDS should climb some more, and he's using it to hedge a few long positions.

Although they are good options for investors looking to continue making gains while the market is on a downward trend, it's always wise to be aware of the risks involved when it comes to short ETFs. The potential to win big is there, but you could crash and burn, too, if caution isn't exercised. Always make sure they are right for your portfolio.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Municipal Bond ETFs Have Attractive Yields

Competitive yields are suddenly giving municipal bond exchange traded funds (ETFs) a new level of attractiveness to investors.

Muni bond ETFs are the new kids on the block; the first ones didn't appear until last September.

On Feb. 1, the Market Vectors Lehman Brothers AMT-Free Intermediate Municipal Index (ITM) was yielding 3.49%. It targets the 6- to 16-year part of the yield curve, reports David Hoffman for Investment News. Another bonus: the yield paid out by munis is free from federal taxation, making their effective income greater than the taxable yield offered right now by Treasury bonds.

Other comparable muni ETFs tell a similar story: the PowerShares Insured National Muni Bond (PZA) had a yield of 4.2% yield, with a tax equivalent yield of 6.46%.The iShares S&P National Municipal Bond Fund (MUB) had a yield of 3.44%, but the tax equivalent yield was 5.07%. The SPDR Lehman Municipal Bond ETF (TFI) yielded 3.34%, with a tax equivalent of 5.14%.

James Colby, Van Eck's senior municipal strategist, says muni bond ETFs are a good option for those investors uncertain about what's going to happen in the Treasury markets. I don't see anything wrong with this strategy, and the municipal bond ETF environment appears relatively safe.

There's always risk, though, including with these types of bonds. That's because the governments behind them pay companies to insure them so that ratings agencies will give them a better rating. However, these companies are at risk of defaulting because they also insured subprime mortgage-backed securities and they're not as in sound financial shape as investors previously believed.

As a result, ratings agencies have started to downgrade bond insurers. At least one agency lost its AAA rating, reports Martin Z. Braun for Bloomberg. The default rate on municipal bonds in 0.1%, but Moody's Investors Service says state and local government debt is still tainted. The threat of more downgrades is something to watch out for.

Are You Doubling Up With ETFs?

When you look at your exchange traded fund (ETF) portfolio, and consider all of the single stocks that you own, are you ever doubling up?

Investing in individual large-caps is great, however, if you also own any part of the S&P 500 through an ETF or mutual fund, you may be too heavily weighted in U.S. large caps. Tim Hanson and Brian Richards for The Motley Fool want to know if that's the kind of asset allocation you intended. Probably not. You could do worse than the S&P 500, of course: it has a roughly 10% historical annual return.

Even within the most conservative game plan, though, there should always be room for small-caps. After all, they're the best-performing stocks on the market. Whether it's 10% or 30%, depending on your risk tolerance, the returns will help you beat the market over the long-term and maximize your savings, especially if you manage to pick the right small-caps.

If you own a broad-based ETF such as the Vanguard Total Stock Market (VTI) and also own stock for, say, Exxon Mobile (XOM), General Electric (GE) or Citigroup (C),you may have unknowingly doubled up on these market mammoths. Make sure to review your portfolio and know what you're holding so that get exposure to different asset classes.

January ETF Performance Report

Exchange traded funds (ETFs) and the markets got off to a rocky start in 2008. Already this year, oil has managed to top $100 a barrel, gold set new records and the Federal Reserve cut rates twice. What awaits us the rest of the year?

The major indexes took a beating this month. The Dow Jones industrial average finished down 4.6%. The Nasdaq ended down 9.9%, and the S&P 500 ended down 6.1%. Precious metals were one of the strongest performers this month. Gold was up 11%, while silver was up 14.6%. Agriculture made a strong showing, too, up 12.3%.

Click here to view the full ETF performance report.

Bernanke Wields the Ax Again, Boosting Stocks and ETFs

Once again, the Federal Reserve stepped in and made a half-point rate cut, a move that Wall Street and exchange traded funds (ETFs) apparently liked.

The rate cut didn't come as a complete surprise, as the stock market had been banking on it. They just weren't sure if it would be the half-point cut, or a more cautious quarter-point, reports Madlen Read for the Associated Press. The move today puts the federal funds rate target at 3%, the lowest since June 2005, according to Mark Felsenthal for Reuters.

Once the cut was announced, the stock markets went positive: within minutes of the decision, the Dow Jones industrial average jumped more than 100 points at one point. The S&P 500 and Nasdaq also rose following the report.

It's positive news, but between this latest cut and last week's unexpected three-quarter point cut, will it be enough to rejuvenate the economy? Let's wait and see.

Quant ETFs And The Fed Model

Does the "Fed Model" created by Ed Yardeni, which uses forward earnings estimates, expose exchange traded funds (ETFs) that use these estimates to added risk? Since we haven't seen a bear market since these funds launched, this should get interesting. Insiders are wondering if estimates lag in bear markets, does it make these models less effective?

Matthew Hougan for Index Universe reports that The Fed Model is a market timing strategy that compares the forward yield on stocks with the yield on the 10-year treasury. The model worked in the 1990s, but over the past decade this has been called a bad measure.

The major problem is that it relies on forward earnings estimates and last summer was a perfect example. Analysts were calling for a 7.7% rise in earnings for the S&P 500, but it actually fell 3.3%. By year's end, analysts were calling for a 15.7% jump for 2008 S&P earnings, which should be coming down fast now.

Quant ETF supporters are arguing that screening methodologies can help them sidestep the worst of a pullback, and that traditional market-cap weighted funds will be exposed to the fall.

ETF Investors Feel Relief at the End of a Long Week

Investors in stocks and exchange traded funds (ETFs) are probably shouting: "TGIO!" That's "Thank God It's Over." It's been a long week, and today wasn't much better.

This morning, things kicked off looking hopeful. Madlen Read for the Associated Press reports that while the Dow Jones industrial average was up more than 180 points, by afternoon it had slid back to 128. The index finally ended the week down 4%. The S&P 500 had a tough week, too: it was the biggest one-week loss for the index since July 2002, and it's currently at 16-month lows. It ended down 5.4% for the week. The Nasdaq closed the week down 3.6%.

The week started out bad, but then it only continued to get worse as economic and housing reports poured in. Fed Chairman Ben Bernanke's testimony lifted hopes that an economic stimulus package might be what the country needs, but the markets obviously didn't agree today. And the fact that the Fed is concerned made the outlook more grim.

Once again, we will reiterate our sell strategy. It's been bumpy and if you haven't started protecting yourself from yet more losses, it's time to think about doing so.

ETF Investors Want Shelter

Some may wonder if the Fed is in denial: while Bernanke calls for a "slow growth path," Wall Street is calling "recession" and exchange traded fund (ETF) investments and benchmarks are on a steady drop.

As Gary Gordon for ETF Expert points out, the S&P 500 SPDR Trust (SPY) has dropped 9.5% in 12 trading days and is roughly down 15% since the October 9 market top. Ouch!

Other benchmarks and ETFs on the same trend are PowerShares QQQ (QQQQ), iShares Russell 2000 (IWM), Financial Select Sector SPDR (XLF), all down on 20%+ losses from admirable highs. Is it time to grin and bear it?

For those investors who are tired of being dragged by those "wild horses" and are saying "gimme shelter," there are places you don't have to feel like a rolling stone. Gordon looks at these funds and possibilities:

• Global Consumer Staples (KXI)
• Medical Devices (IHI)
• Lehman International Treasuries (BWX)
• Emerging Market Debt (PCY)

Another Rough Day; Save Your Portfolio By Having an ETF Sell Strategy

The markets wrapped up another ugly day for stocks and exchange traded funds (ETFs) this afternoon.

The Dow Jones industrial average fell more than 2%, says Tim Paradis of the Associated Press, and it was down more than 300 points. The Nasdaq fell 1.9% and the S&P 500 dropped 2.9%.

Things today got off to a decent start, but that was quickly unraveled after the Philadelphia Federal Reserve said its survey of regional manufacturing activity registered at -20.9 from a revised reading of -1.6 in December.

That news was only followed by more bad news from the homebuilding and real estate sectors: housing starts were down and the building of new homes dropped 8% last month.

Now is a good time to review your sell strategy and make sure that you are sticking to your plan. It can be hard in times like these to keep your emotions from entering into the equation, but it's one of the keys to being a successful investor.

We're living in a different world now than the one we knew in 2007. Many of last year's top performers are suddenly losing ground. If you're holding on to those ETFs and remembering the good times, review them and see if it's time to implement that exit strategy.

What's Your ETF Sell Strategy?

The S&P has not had a 10% correction in many months....until today.

Joe Bel Bruno for the Associated Press reports that persistent fears of a recession, weak retail sales figures and disappointing results from Citigroup sent the markets plunging.

What's an investor to do? Where most well-known market index ETFs such as the Dow, S&P and Nasdaq have dropped more than 10% off of their recent highs, some international and sector-specific ETFs have corrected more than 20%.

This could be a normal correction and the market could catch up to where it left off a few months ago. But what if it doesn't? What if the doom and gloom pasted all over CNBC is correct? Here are three rules that we continue to remind investors about that should keep most of us out of trouble:

1. Maintain an 8% stop-loss on your ETFs.
2. Keep an eye on the trend. If your ETF declines below its 50-day average, that's not a good sign. If the same ETF declines below its 200-day average, sell.
3. Don't chase markets that are too hot. The last time many world markets and industry groups collectively hit news highs was in 2000. You know what happened then. Keep your emotions in check.

New S&P Inverse Index Could Trigger New ETFs

This month, Standard & Poor's introduced the S&P 500 Inverse Index - does this mean exchange traded funds (ETFs) will follow?

The index provides the inverse performance of the widely used stock benchmark, reports Barry Burr for Pensions And Investments. For U.S. investors, the inverse index will serve as a benchmark to measure short positions in equities.

For investors in Europe and Asia, where many legal limits don't allow index shorting not based on an existing shorting index, the index inverse can serve as a basis for creating investment products such as ETFs. The S&P Inverse index return will be priced daily.

Select Sector SPDRs Assets Grow in 2007

A family of exchange traded funds (ETFs) grew larger in 2007, money-wise.

Select Sector SPDRs' assets climbed $8.87 billion, or 51.95%, reports the Centre Daily Times. In terms of sectors, the Select Sector SPDRs Financials (XLF) pulled in the most assets, $5.02 billion - that's 122.94% growth.

Wait a minute. Isn't the financial sector hurting? Then why are so many assets flowing into it?

One possible reason, according to the director of wealth management at Select Sector SPDRs in an appearance on CNBC, is that investors may simply see a basket of funds as less risky than an individual stock. Minimizing your direct exposure in some sectors, especially ones that are hurting, can in turn minimize portfolio risk.

Dolan cites the example of Merrill Lynch (MER) vs. XLF. Last year, Merrill Lynch lost 41.3%. Contrast that with XLF, which lost 19.2%. Yes - still a loss, but a significantly lower one. It's another example of the benefits of ETFs and the instant diversification they provide.

Most of the other sector SPDRs ended the year in positive territory. The only one that lost assets was the Ultility SPDR (XLU), down 16.8%.

Fund's Performance May Be a Harbinger of Tough Times for Small Cap ETFs

While two exchange traded funds (ETFs) might follow the same underlying index, discrepancies are still possible.

A case in point is the SPDRs (SPY) vs. the Rydex S&P Equal Weight (RSP). Each fund has the same 500 stocks, but while SPY is weighted according to market cap, with an emphasis on large-caps, RSP is equal weighted and tends to favor the mid- and small-caps.

Arthur B. Hill of ETF Investment Outlook says that by looking at the performance of these two funds, investors can get a sense of the performance of small caps vs. large caps. The fact that the RSP dipped below its November low indicates there may be relative weakness for small-caps as a whole. Over the long-term, small-caps have outperformed large-caps.  It has only been recently that we've seen a shift where small-caps are underperforming large-caps.

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

Fidelity is Showing Some Vigor, but What Does It Mean for ETFs?

It appears there are definite signs of life over at Fidelity Investments, the mutual fund giant that has so far resisted throwing itself fully into the exchange traded fund (ETF) arena.

Last year, many of the company's trademark funds went from lagging to leading. This may not be enough to make up for lost time over the past several years, reports Suzanne McGee for Barron's but it does help. The average annual return was at 12.7% annually compared to 12.82% for the S&P. Some insiders believe this is the start of a golden turnaround for the mutual fund specialists. Veteran managers like Harry Lange and Will Danoff, along with newbie Jason Weiner, are on board and ready to relive the mega status by posting the returns they earned in the 1970s-mid 1990s.

The big question is, will investors respond to the improvements in research and management and get back into funds they've abandoned in recent years? Or will investors write off mutual funds for good and stick with ETFs?

It's going to get interesting.

Mutual Fund Investors Prefer ETFs

Investors seem to favor exchange traded funds (ETFs) and investments with a foreign flair.

Fidelity Investments and JP Morgan Asset Management suffered the largest net outflows from their U.S. mutual funds among their rivals, as State Street Global and American Funds garnered the most inflows, reports Cardiff de Alejo Garcia for Financial News. State Street can thank their ETFs for the increased inflow. It boasted $5.7 billion in inflows into their SPDR Trust ETF which tracks the S&P 500 index.

Investors in particular showed a preference for funds with international assets and increasingly turned against actively managed domestic funds.

Bargain Basement ETFs

Exchange traded funds (ETFs) are popular because they offer diversification, tax efficiency, lower costs and lower expense ratios than most investment tools. ETFs trade on an exchange like a single stock, but beware that too many trades can cut away returns, reports Rich Duprey for The Motley Fool. ETF assets totaled $588 billion as of October 2007.

Duprey lists some of the most cost-effective ETFs around, and all of them have at least a three-year performance track record.:

• Vanguard Total Stock Market (VTI), expense ratio 0.07%; three-year return of 13.98%
• Vanguard Large-Cap (VV), expense ratio 0.07%; three-year return of 13.94%
• SPDRs (SPY), expense ratio 0.08%; three-year return 13.04%
• Vanguard Extended Market Index (VXF), expense ratio 0.08%; three-year return 16.25%
• iShares S&P 500 (IVV), expense ratio 0.09%; three-year return 13.10%
• Vanguard Small-Cap (VB), expense ratio 0.10%; three-year return 14.84%
• Vanguard Value (VTV), expense ratio 0.11%; three-year return 15.49%

S&P 500 Marks Its Golden Anniversary

This year marked the anniversary of the index on which the first exchange traded fund (ETF) was based: the S&P 500. In March 1957, the index that would become the most widely used U.S.-linked index was born and Standard & Poor's has been celebrating all year long. Part of the party was in New York, where they rang the closing bell in March.

David Blitzer, Standard & Poor's chief investment strategist, says that while he knew the index was no doubt valuable, he didn't realize just how much of an impact it truly had until he began putting together a book about its first fifty years. A slew of contributors quickly signed on to lend their voices to the project, including such thought leaders as John Bogle and Jeremy Siegel.

"Consistently, as we went through, this history of the index was the history of everything we knew. I knew the index was pretty significant. It was present in the creation of anything significant," Blitzer said.

His favorite discovery? Learning that it was the first index to have its calculations done by computer during the trading day. "It was not quite real time. It took about an hour. But it was the first time anyone had set up an index and tried to calculate it during the day."

In 1993, the SPDRs (SPY) were launched -- no doubt a nod to the S&P 500 as a major, important player in the world of indexes.

In 1995, Blitzer was appointed to be the chairman of the committee that decides which stocks are added or bumped from the index. As he settled into the role, he asked his predecessor what he could do differently than he had. "Go and tell everyone about [the index]," came the response.

"Thirty-eight years the index was around, yet we had never promoted it in a huge way in the public. That was my charge," Blitzer said. Getting it to become a household name like the Dow Jones industrial average became a goal.

It's safe to say his mission has been accomplished.

ETFs and the Market Dip on Bernanke's Gloomy Economy Forecast

The markets, and many exchange traded funds (ETFs), were down today on news from Federal Reserve Chairman Ben Bernanke that the housing market continues to dampen the economy. In a speech Monday night, Bernanke said the effects from this summer's housing market and credit crunch could be felt through the winter, reports Madlen Read for the Associated Press.

The news comes on the heels of oil's record price above $86 a barrel. Rising home mortgage prices combined with higher oil prices could signal real trouble for many U.S. consumers. Oil continued to climb today, with crude futures closing at a new record price of $87.61 per barrel. In addition, the Dow Jones industrial average and the S&P 500 posted their biggest point drops in five weeks yesterday after Citigroup (C) reported a large third-quarter profit decline. On top of that, Wells Fargo (WFC) fell more than 3% after its third-quarter earnings were less than what analysts had expected. In response to today's news, the S&P 500 Index dropped 0.7%, the Nasdaq Index fell 0.6% and the Dow Jones industrial average slid 0.5%.

Happy 5th Birthday to the ETF Bull Market

Today, Oct. 10, marks the fifth birthday for the bull market that has blessed the markets and exchange traded funds (ETFs). The S&P 500 received official cyclical bull market status on Nov, 21, 2002, when it closed at 933.76, more than 20% above the Oct. 9 close, reports Sam Stovall for BussinessWeek.

The S&P defines a bull market as an advance of at least 20% from the low set during a prior bear market. However, that's only one way to define a trend. Some analysts say a new trend is set if a certain behavior lasts for 20 days. According to a trading and investing newsletter from LearnMoney, anybody or anything can cause the markets to move over the short term, but moves for at least 20 days means a new trend is in place. Our position with investing is to look at trends using the 200-day moving average.

Based on the Oct. 8, 2007, close of 1,552.58, the S&P 500 is 103% higher than it was on Oct. 9, 2002. SPDRs (SPY), which is the ETF that tracks the S&P 500, is up 17.0% for the last five years. So how does our current bull market compare to other bull markets? How long can we expect this bull market to last?

By the S&P's definition, there have been 10 completed bull markets for the S&P 500 since 1942, averaging 56 months in length. Although we just hit our 60th month in the game, three of the prior 10 bull markets have lasted longer, with the bull market of 1990-2000 being the longest. Investors who worry about investing at the height of bull markets might be happy to hear that on average, all of the prior bear market's decline was recovered by the second year of the new bull market. Based on our current bull market's 103% recovery of the prior bear market's 750-point decline, this bull market's performance places it among the slowest recoveries since 1942.

Everyone wants to know if our current bull market will celebrate a sixth birthday. S&P's equity analysts predict that our run will be over in September of 2008 near the 1,700 level. Of course, no one really knows for sure.

SPDRs (SPY) ETF Rakes in the Dough

The exchange traded fund (ETF) that tracks the S&P 500, SPDRs (SPY) added $20.7 billion in assets from Sept. 14 to Sept. 21, according to the American Stock Exchange (AMEX).

There are only two other ETFs in the world that have more than $20 billion in assets. The iShares MSCI EAFE Index (EFA) has $47.6 billion, and iShares MSCI Emerging Markets Index (EEM) has $20.9 billion, says Matt Hougan for Index Universe. SPY now makes up 16% of total U.S. ETF industry assets, and is larger than the smallest 491 ETFs combined. With an expense ratio of 0.1%, it grosses $91.6 million annually in fees.

For full disclosure, some of Tom Lydon's clients own EEM.

The History of Select Sector SPDRs ETFs

Throughout all the releases of new exchange traded funds (ETFs) one core group of nine ETFs that have been around since 1998 are the Select Sector SPDRs. These ETFs track the different sectors of the S&P 500.

Originally, Merrill Lynch sponsored the SPDRs ETFs, but today it is considered the index agent for the ETFs. This means that whenever there is a change to the ETFs, Merrill Lynch decides in which sector the new stocks belong, explains David Hoffman for Investment News. Currently, State Street Global Advisors manages the SPDRs ETFs that have collected more than $20 billion in assets. With State Street Global Advisors managing the ETFs and ALPS distributing them, a separate, independent board of directors makes decisions regarding the operations of the Select Sector SPDRs, explains Daniel P. Dolan of ALPS Distributors. Having the independent board of directors has also helped lower expenses for the Select Sector SPDRs, but in general, ETF expenses have crept up, he says.

The nine Select Sector SPDRs ETFs and their performance year-to-date include:

• Consumer Discretionary Select Sector SPDR (XLY) - down 4.4%
• Consumer Staples Select Sector SPDR (XLP) - down 4.5%
• Energy Select Sector SPDR (XLE) - up 17.4%
• Financial Select Sector SPDR (XLF) - down 6.2%
• Health Care Select Sector SPDR (XLV) - up 3.5%
• Industrials Select Sector SPDR (XLI) - up 12.2%
• Materials Select Sector SPDR (XLB) - up 12.8%
• Technology Select Sector SPDR (XLK) - up 10.2%
• Utilities Select Sector SPDR (XLU) - up 6.4%

10 ETFs That Have Dropped During the Recent Market Decline

As of market close yesterday, the S&P was 9.1% off its recent high, but some exchange traded funds (ETFs) have given back two or three times as much. Having an exit strategy helps protect investors from going down with ETFs when they plummet. Below are some ETFs that have lost the most during the recent market decline:

1. SPDR S&P Homebuilders (XHB) - off 46.8% from April 5, 2006
2. United States Oil (USO) - off 26.8% from July 13, 2006
3. iShares Cohen & Steers Realty Majors (ICF) - off 26.7% from Feb. 7, 2007
4. iShares Dow Jones U.S. Real Estate (IYR) - off 26% from Feb. 7, 2007
5. Internet Infrastructure HOLDRs (IIH) - off 24.6% from July 13, 2007
6. DJ Wilshire REIT ETF (RWR) - off 24.4% from Feb. 7, 2007
7. Market Vectors Steel ETF (SLX) - off 23.7% from July 12, 2007
8. iShares S&P Latin America 40 Index (ILF) - off 22.3% from July 23, 2007
9. SPDR S&P Metals & Mining (XME) - off 21.8% from July 13, 2007
10. Claymore/BNY BRIC (EEB) - off 21.6% from July 23, 2007

Market Update: Stocks and ETFs Drop Again

It seems as if nothing will satisfy the markets and exchange traded funds (ETFs) that continue to drop and climb in protest of the credit tightening and housing market slump. Even another cash injection from the Federal Reserve couldn't smooth out the volatility. The Dow Jones industrial average closed down nearly 170 points and the S&P 500 is down for the year now, according to Madlen Read for the Associated Press.

DIAMONDS Trust, Series 1 (DIA) was down 1.3% for the day and is touching its long-term trend line.  SPDRs (SPY) ended the day down 1.4% and is 2.8% below its trend line.

Today the Fed deposited $7 billion into commercial banks in the form of a "repo," which is where it buys securities from dealers and puts the money into the banks. Despite the latest addition, the Fed seems to remain steadfast in its decision not to lower interest rates. Some analysts agree this is in the economy's best interest, and that the most prudent course of action is to let the market cycle through a correction. The market is almost at the correction point of a 10% drop as the Dow is now more than 8% below its record close.

Market Update: Stocks and ETFs Suffer Losses

No bulls are in sight today for the markets or exchange traded funds (ETFs). The Dow Jones industrial average and it's ETF counterpart DIAMONDS Trust, Series 1 (DIA) dropped more than 200 points, and the S&P 500 and its ETF twin SPDRs (SPY) fell 1.8%, dipping it below its trend line where it's hovered for most of August. Ongoing credit concerns related to the subprime industry's problems and stocks' volatility are the likely culprits behind the drop, reports Joe Bel Bruno for the Associated Press. Wal-Mart's (WMT) lower-than-expected earnings report didn't help either. Home Depot (HD) said the housing and homebuilding sectors' weakness has negatively impacted its earnings as well.

The extreme market volatility has also affected buyouts that have been popular lately. As credit markets are tightening, the number of large corporate buyouts could dramatically slow, according to David Cho and Thomas Heath for The Washington Post. If some buyouts don't go through, it could increase anxiety in the markets further, making it even more difficult for companies or individuals to get loans.

For full disclosure, some of Tom Lydon's clients own DIA.

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