During the credit collapse, investors dumped gold, corporate bonds, stocks and commodities in favor of U.S. Treasuries, comments Gary Gordon for ETF Expert. Then starting in March of 2009, stocks and gold rallied while interest in Treasury bonds waned. However, the three asset classes began to move in unison over the last three months.

What could be the reasons? Among the theories being floated (and the real answer could include any combination of these) include:

• Investors are beginning to take all that cash from under the mattress and are putting it back into all corners of the market, whether it’s low-risk or high-risk assets
• Portfolios are being swapped for entirely new strategies
• Gold is in demand for its hedge against the weakness of the U.S. dollar
• Stocks, to an extent, may also be used to hedge against inflation and people are buying them to avoid missing out any any further recoveries in the markets
• Long-term Treasury yields have been significantly diminished and it may be the first asset class to decouple from this threesome, says Gordon

In the off chance that investors start favoring Treasuries again, stock investor, and maybe some gold traders, may think twice and consider shifting wealth into the safe haven. On the flip side, the stock markets may gain more if investors favor risk above the safety of Treasuries.

• SPDRs S&P 500 (NYSEArca: SPY): up 11.1% in the last three months

• SPDR Gold Shares (NYSEArca: GLD): up 5.4% in the last three months

• iShares Barclays 20+ Year Treas Bond (NYSEArca: TLT): up 5.2% in the last three months

Max Chen contributed to this article.

Many ETFs have been trending higher in recent weeks, says Gary Gordon for ETF Expert. The pattern of the funds recovering indicates that while investors are more willing to take on risk than they were a year ago, there is still some fear lingering.

The stimulus package is proving to lead to increasing business access to credit and government-stimulated GDP.

Some of the ETFs that have been on the move by varying degrees in the last month or so include:

• iShares Investment Grade Bond (LQD)
• iShares High Yield Junk (JNK)
• SPDR International Treasury Bond (BWX)
• JP Morgan Emerging Market Bond (EMB)
• iShares S&P Preferred Index (PFF)
• iShares Lehman Treasury 20-Year Treasury Bond (TLT)
• Vanguard Total U.S. Market (VTI)
• Vanguard Developed Europe Pacific (VEA)
• Vanguard MSCI Emerging Markets (VWO)

TLT’s presence on the list is evidence that there’s still some worry hanging around. Treasury debt prices rose on Wednesday, in fact, as investors wondered whether the recovery had staying power, reports  John Parry for Reuters. Investors also don’t seem to be up for taking on much risk via commodities, Gordon points out.

There will still be market pullbacks and corrections as well as profit-taking, but pick your spots. There are several areas that are in uptrends – you just have to look for them. At ETF Trends, we use the 200-day-moving-average to spot market trends and patterns.

For more stories about trend following, visit our trend following category.

In this corner, we have bonds. In the other, equities. Advocates of both are squaring off:

• Equities have the ability to outperform bonds because they have the ability to double or even triple in price in a short time period.  Advocates of equity, in particular “Wizard of Wharton” Jeremy Siegel, says that the stocks are the wisest asset to hold in order to build decent wealth.
• Advocates of bonds, such as PIMCO’s Bill Gross, say that bonds protect investors from terrible downfalls and that it’s virtually impossible for Treasuries to sink as low as stocks.

To put it into perspective, over the last 40 years large-cap stocks have returned 9.2% annually as compared to 8.5% for long-term government bonds.  If one doesn’t consider the most recent market crash and the dot-com collapse, the gap is even larger.

So will this trend of a bond run-up continue?  We can’t answer that, and there are many who are skeptical that it will. So far for the year, stocks have outperformed Treasuries.  The reason behind this is that Treasury prices are being brought down as a result of the enormous outpouring of new Treasury obligations and that inflation might ensue, states Larry Light for The Wall Street Journal.

• iShares 7-10 Yr Treasury (IEF): down nearly 4.9% year-to-date with a yield of 3.91%

• iShares Barclays 20+ Yr Treasury Bond (TLT): down 17.7% year-to-date with a yield of 4.12%

For more stories on Treasuries, visit our Treasury category.

Kevin Grewal contributed to this article.

The Federal Reserve is meeting this week, setting off a buying spree in the Treasury market. On Tuesday, $40 billion of two-year notes were bid upon, and investors are bracing for two more auctions this week: $37 billion in five-year notes today and $27 billion in seven-year notes Thursday, reports Min Zeng for Dow Jones Newswires.

As of Monday, U.S. government debt prices rose, giving the picture of a weak stock market mixed with the allure of safe haven investments. Burton Frierson for Reuters reports that Wall Street appeared to be skeptical about the strength of an economic recovery in store for the United States this year, taking stock markets down with the doubt.

Treasury purchases by the Federal government lent some support on Monday as well, with the central bank buying Treasuries maturing in five to six years.

There is about a 2% weakness within the equity markets, and this is enough to fuel the demand for bonds and keep investors nervous about the overall recovery for the United States this year.

• iShares Barclays 7-10 Year Treasury (IEF): down 8.8% year-to-date

For more stories on Treasuries, visit our treasury bond category.

Since September, fixed-income ETFs have been experiencing a wild ride, writes Paul Amery for IndexUniverse. Long-term government bonds saw a end-year really and then a retraction. Corporate debt was on the decline in the fall, but investors still put money into the sector. Despite deflationary worries, investors are also attracted to inflation-protected debt.

Yield Curves. Long-term fixed-rate government bonds attracted lots of interest. The iShares Barclays 20+ Year Treasury Bond (TLT), which is down 18.1% year-to-date, increased 30% in the months of November and December. The rise in long bond yields thus created steeper government yield curves.

Corporate Bonds. Since last fall, the corporate bond sector, iShares iBoxx $ Invest Grade Corp Bond (LQD) is down 2.4% year-to-date, has attracted investor inflows. This type of bond is more sensitive to steepening yield curves and to long-term default risks. Currently, iShares corporate debt funds offer gross redemption yields just shy of 10%. High-yield bonds have been attracting interest, too.

Emerging Market. The iShares JPMorgan USD Emerging Markets Bond (EMB), which is up 2.8% year-to-date, has dropped 30 points in October and November then later making up most of the losses. Falling commodity prices and the condition of the global economy resulted in higher default risks in the emerging markets. But now, commodity prices are stepping up and an optimistic economic outlook have boosted investor sentiments.

Inflation-linked. The low levels of break-even inflation rates in inflation-linked bonds compared to fixed-rate bonds have enticed investors. TIPS, iShares Barclays TIPS Bond (TIP) is up 2.3% year-to-date, holders would be rewarded at the expense of fixed-rate bond holders if the there is any positive average inflation rate over the next 10 years.

Max Chen contributed to this article.

With the announcement of bankruptcy by Chrysler LLC and the a surge in corporate defaults in April, junk bonds had their best performance in more than two decades, states Randall Forsyth of Barron’s.  The PowerShares High Yield Corporate Bond ETF (PHB), which has a whopping yield of 11.46%, gained 8.9% over the last month.

On the other end of the spectrum, Treasuries got slammed  as the Federal Reserve’s plan to buy over $1 trillion of government, agency and mortgage-backed securities was undercut by reduced demand by investors and the inundation of Treasury auctions to finance the budget deficit.  The iShares Barclays 20+ Treasury Bond ETF (TLT), which dropped 8.4% over the last month.

In general, corporate sectors and Treasuries move in tandem; however this case is an exception because of  wide corporate spreads and low Treasury yields.

To add to the slow demise of the Treasury market, many investors are starting to steer away from Treasuries.  Granted, these investment tools held up fairly well during the financial crisis of the previous year, but many believe that they are just not appealing.  Short-term bonds yield a small 1.9% and long-term bonds are coming under serious risk from inflation, states Brett Arends of The Wall Street Journal.

In times of deflation, Treasuries hold up fairly well.  However, in times of inflation, the minuscule returns offered by Treasuries are often eaten away and go into the red.

It is always a good idea to remain diversified, keep a balanced portfolio and watch the trend lines.

For full disclosure, some of Tom Lydon’s clients own shares of TLT.

Kevin Grewal contributed to this article.

While investors should always meticulously research a stock, ETFs do allow an individual to hedge his or her market position and give some balance to a portfolio, remarks Bradley Johnson for Personal Financing and Investing. In our strategy, we wait for signs of potential long-term uptrends in ETFs and utilize a 200-day moving average.

Johnson provides some areas that may help potential investors create a balanced portfolio. As with any holding, always do your homework and be sure the trend is there before you jump in:

Gold. Gold has traditionally been a hedge against inflation, and most countries have been pumping money into their financial systems, which many see as a precursor for inflation.

• SPDR Gold Shares (GLD): down 1.4% year-to-date

Treasury Inflation Protected Securites. Just as the name entails, this type of ETF is an inflation hedge. The treasuries are based on the government’s calculation of the consumer price index (CPI), and they tend to not have large or random fluctuations. But the inflation-based principle will be taxed.

• iShares Barclays TIPS Bond (TIP): up 2.5% year-to-date

Long-Term Treasuries. These are not positively correlated with inflation, but are correlated with market pessimism. People who are worried about the markets flee to the relative safety of treasuries.

• iShares Barclays 20+ Year Treas Bond (TLT): down 13.4% year-to-date

Oil. It may move with inflation, but the driving factor is based on energy demand. When an economy slows, production will slow down, and eventually this should drive up prices. In the short term, oil prices may still be low.

• United States Oil (USO): down 8.7% year-to-date

Agriculture. This area allows an investor to be included in a sector that will still see some signs of life even in a downturn. It comes down to the fact that people still need consume.

• PowerShares DB Agriculture (DBA): down 5.3% year-to-date

Max Chen contributed to this article.

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%.

Bonds usually receive lower returns compared to stocks because of less risk, but since Jan. 1, 2000, bonds have outperformed stocks by more than 50%, according to The Herald Tribune. One such ETF reflecting this trend is iShares Barclays 20+ Year Treasury Bond (TLT), currently up 36.7% year-to-date, with a yield of 3.93%. Investors may continue to find bonds attractive, since stocks may not return to normal for the time being. However, there are those who think bonds are trotting into “overvalued territory.”

Recent deflation woes have caused conventional government bonds to plummet, but inflation-linked bond yields have been rising, reports Paul Amery for Index Universe. Treasury Inflation-Protected Security (TIPs) real yield rose from .9% in March to its peak of 3.15% on Nov. 21, now currently around 2.6%. One such TIP-related ETF, iShares Lehman TIPS Bond (TIP), is currently up 0.2% year-to-date, with yield of 7.83%. The fall in price of inflation-linked bond indices have shown a rise in real yields.

A way to compare conventional (fixed-rate) and inflation-linked bonds is to calculate the break-even inflation rates for different inflation-linked securities. You take the average annual inflation rate over the life of the bond by the the difference between the inflation-linked bond’s real yield and yield on a fixed rate bond of a comparable maturity.

If the actual inflation rate is higher over the period than the break-even rate implies, the inflation-linked bond should be bought at the expense of the fixed-rate bond. Or vice versa, whichever the case may be. At present, investors may only invest in inflation-linked bonds in the U.K. and the U.S. markets.