ETF Trends
ETF Trends

Exchange traded funds (ETFs) are in the homestretch of 2008, and the last nine months have got us reflecting on where we’ve been and where we’re going from here.

The big question is: can it get much more volatile? Leslie Scism for the Wall Street Journal takes a look back. Back in 2000-2002, it was easy to find the culprit: dot com and technology stocks. This time around, it’s not so easy.

For the third quarter, the average diversified mutual fund holding U.S. stocks has lost 10.3%, for a year-to-date loss of 19.7%, according to a Lipper survey. That’s worse than the performance of all three major indexes.

One thing is for sure: the value of ETFs has become more evident. As some money market funds “broke the buck” because of exposure to Lehman and other crumbling financial institutions, investors are realizing the importance of “knowing what you own.” Some mutual funds are even getting into the game, stepping up their disclosure frequency to satisfy investors who want to know more than once a quarter what their exposure in certain areas happens to be.

Investors are learning about risk in big ways, too. Because of the stunning market volatility, some ultra short funds delivered wild swings in the double digits as the markets turned on a dime. The failure of Lehman Brothers has illustrated the inherent risk in exchange traded notes (ETNs), as well: as securities that are as good as the credit of the issuer, when the issuer goes under, investors can be left holding the bag.

The answers to our questions about volatility, the future of our economy and what it’s going to mean for how and where we invest all lie in the next three months.

Whatever happens, just remember to stick to your strategy and don’t panic. We can guess and predict all we like, but the truth is no one really knows where the markets are headed. It’s why we use a trend-following strategy here: get in when a fund is above its 200-day moving average; hit the exit button when it falls below that point or 8% off its recent high. This strategy keeps us in areas that are moving up, while allowing us the change to protect ourselves on the downside.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.