From the January 2009 issue of Research Magazine • Subscribe!

The Best ETFs of 2008

If you want to know what kind of year 2008 was, all you have to do is look at the lopsided performance of exchange-traded funds (ETFs). The top ETF performers in 2008 were mostly short ETFs designed to profit when the market falls. With major domestic and international equity benchmarks declining between 40 to 50 percent in 2008, short ETFs were one of the few places that provided shelter.

Let's look at a few of this year's top ETF performers, as of late December.

ProShares UltraShort Semiconductors (SSG) +126.70 percent gain: In 2008, ever volatile semiconductor stocks led on the way down, which meant outsized gains for SSG. This particular short ETF attempts to double the inverse daily performance of the Dow Jones U.S. Semiconductor Index. Even though SSG racked up nice gains, it also racked up a sizeable tax bill by distributing a staggering $42.35 in short term capital gains.

ProShares UltraShort Technology (REW) +107.13 percent gain: Aside from financial shares, broader technology stocks were one of this year's worst performing S&P industry sectors. Like other short leveraged ETFs, REW distributed a sizeable $26.46 short term capital gain.

ProShares UltraShort Industrials (SIJ) +90.22 percent gain: A 57 percent year-to-date decline in shares of the once invincible General Electric (GE) pretty much sums up the kind of year it's been for industrial stocks. SIJ's double inverse exposure to industrial stocks was one of 2008's biggest winners.

Rydex Inverse 2x S&P 500 ETF (RSW) +82.19 percent gain: Rydex is another ETF family that offers short and leveraged ETFs and many of their funds racked up stellar gains. Even with the SEC's temporary ban on short selling financial stocks during the fall, RSW still managed to perform well. It paid out short term gains that represented 13.22 percent of the fund's net asset value (NAV).

Vanguard Extended Duration Treasury ETF (EDV) + 50.27 percent gain: EDV was one of the few non-short and unleveraged ETFs that performed handsomely in 2008. This fund follows the Barclays Treasury STRIPS 20-30 Year Equal Par Bond Index. It contains zero-coupon U.S. Treasury securities (Treasury STRIPS) with maturities ranging from 20 to 30 years. A Treasury STRIP is a single coupon or principal payment from a U.S. Treasury security that has been "stripped" into separately tradable components. Falling interest rates and investor demand for the relative safety of government bonds drove EDV's stellar performance.

What lies ahead for 2009? While no one knows for sure, if stocks rebound watch out. 2008's ETF winners could very well turn out to be the losers of 2009.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com

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