Investors are always on the lookout for that new money-making deal that would help fill their lonely pockets with a fistful of cash, but those who choose incorrectly may have even lost the pants that those pockets were in.

According to John Spence for The Wall Street Journal, 2008 was not a kind year for traders investing in:

• SPDR S&P 500 (SPY): dropped 37%
• iShares MSCI EAFE Index Fund (EFA): dropped 41%
• PowerShares FTSE RAFI Emerging Markets Portfolio (PXH): dropped 45%
• ProShares Ultra Financials (UYG): dropped 85%
• iShares Dow Jones U.S. Home Construction (ITB): dropped 43%
• Commodities and material ETFs also took a beating. Most notably, oil ETFs and exchange traded notes (ETNs) that saw that drop of oil to below $40 a barrel. United States Oil Fund (USO) dropped 56%.

The important thing for investors to keep in mind is that some of the most beaten-down sectors will have the best opportunities for a recovery later. Some real bargains are lurking around the markets right now, so eye these funds and see if they move above their trend lines before you consider whether they’re right for you and your goals.

On the flip side, there are those lucky few who did not choose lemons in 2008 and profited with ETFs and ETNs such as:

• ProShares UltraShort S&P 500 (SDS), a leveraged, bearish fund designed to short the market, gained 61%.
• Long-term Treasury bonds sensitive to rate changes benefited from near zero Fed rate cuts. Vanguard Extended Duration Treasury ETF (EDV) gained 55%. iShares Lehman 20+ Year Treasury Bond Fund (TLT) gained 34%. SPDR Lehman Long Term Treasury ETF (TLO) gained 24%
• Currency ETFs that tracked the weakness of the dollar to other currencies also benefited. iPath JPY/USD Exchange Rate ETN (JYN) gained 23%. Rydex CurrencyShares Japanese Yen Trust (FXY) also gained 23%.

Overall, markets greatly shrunk in volume, but investors still continued to invest in ETFs. Market turmoil is also said to raise questions regarding ETNs and their innate credit risks for investors.

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

The Dow Jones Industrial Average ended 2008 with a two-day winning streak, but was still down for the year by 33.8%. It was the Dow’s worst annual performance since the Great Depression was in full force. The S&P 500 this year lost 38.5%, while the Nasdaq fell 40.5%.

This year, 19 of the top 20 ETFs for 2008 were of the short and ultra short variety. The other best-performing ETFs of the year were telling about the state of our economy, too, as they were focused on Treasuries and the Japanese yen.

The strongest ETF for 2008 was the ProShares UltraShort Semiconductor (SSG), which ended the year up 110.9%.

The other top short ETFs this year include:

• ProShares UltraShort Technology (REW), 95.3%
• ProShares UltraShort Russell MidCap Growth (SDK), 94.4%
• ProShares UltraShort Russell 1000 Growth (SFK), 80.8%
• ProShares UltraShort QQQ (QID), 77.3%

Leveraged and short ETFs should be played with ample knowledge by investors who understand their risks.

The other top area for ETFs were those focused on Treasury Bonds, which were a focal point for investors this year as they sought safety from the turbulent markets. In fact, the investor rush to these funds caused yields to hit lows not seen in decades. One auction of short-term Treasuries this month brought a 0% yield – and investors still snapped them up at an unprecedented pace.

The top-performing Treasury ETF was the Vanguard Extended Duration Treasury Index (EDV), which finished the year up 49.3%. This fund seeks to track the performance of an index made up of extended-duration zero-coupon U.S. Treasuries. The yield on this fund is 2.79%.

Other top Treasury ETFs this year returned between 25%-35%:

• iShares Barclays 20+ Year Treasury Bond (TLT)
• SPDR Lehman Long-Term Treasury (TLO)
• PowerShares 1-30 Laddered Treasury (PLW)

The Japanese yen also had a solid year, with two ETFs focused on the currency delivering solid double-digit returns for the year. The Currency Shares Japanese Yen Trust (FXY) and iPath JPY/USD Exchange Rate ETN (JYN) ended 2008 with double-digit returns of more than 20%.

Japan’s Nikkei just closed its worst year ever, down 42%. The stronger yen has no doubt had an impact on an economy that’s already struggling, as it further tamps down demand for exports that have become more expensive to foreigners. Japan’s manufacturers are planning the biggest job cuts they’ve seen in 35 years.

The top long equity ETFs were focused on gold, closing out the year with gains in the low single digits – around 4%.