What ETFs were 2008's Biggest Winners?

By Ron DeLegge, Editor

December 30, 2008

SAN DIEGO (ETFguide.com) - 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). 

Most of 2008's top ETF performers had one thing in common: They were short or inverse performing funds.

Short ETFs are designed to provide the opposite performance of the stock, bond, or commodity indexes they track. Some of these funds use leverage, which means they attempt to magnify their daily performance by two or three times. 

With major domestic and international equity benchmarks falling between 40 to 50% this year, short ETFs were one of the few places that provided shelter. Let's examine some of this year's top ETF performers.

ProShares UltraShort Semiconductors (NYSEArca: SSG) +127.23% YTD Gain

After making our ETF Profit Strategies Hot List in November, SSG subsequently zoomed ahead by 55.74%. In 2008, ever volatile semiconductor stocks led on the way down, which translated into 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 (NYSEArca: REW) +109.63 YTD Gain

Aside from financial shares, broader technology stocks was one of 2008's worst performing S&P industry sectors. REW made it to ETFguide's Hot List and subsequently jumped another 70.45%.  Like other short leveraged ETFs, REW distributed a sizeable $26.46 short term capital gain.

ProShares UltraShort Russell 1000 Growth (NYSEArca: SFK) +94.46% YTD Gain

While many fund managers with a value tilt became 2008's laughing-stock, growth oriented investors weren't that much better. A 39% drop in large cap growth stocks did its fair share of financial damage. Anyone that held SFK long-enough enjoyed a nice return.  

ProShares UltraShort Industrials (NYSEArca: SIJ) +94.69% YTD Gain

A 57% year-to-date decline in shares of the once invincible General Electric (NYSE: GE) pretty much sums up the kind of year it's been for industrial stocks. It's enough to get stir up the orange juice and pizza in your stomach. SIJ's double inverse exposure to industrial stocks was one of 2008's Biggest Winners.

ProShares UltraShort QQQ (NYSEArca: QID) +88.63% YTD Gain

Remember the good old days of Nasdaq 5,000? Too bad those days are long gone. The technology heavy Nasdaq-100 contains the largest 100 domestic and international non-financial companies listed on the Nasdaq Stock Exchange. QID's inverse performance was a good place to be in '08.

Rydex Inverse 2x S&P 500 ETF (NYSEArca: RSW) +82.88% YTD Gain

Contrary to what you may have been told, ProShares is not the only leveraged and short ETF family around. Ever heard of Rydex Investments? Even with the SEC's temporary ban on short selling financial stocks during the fall, RSW still managed to rack up stellar performance gains. It paid out short term gains that represented 13.22% of the fund's net asset value (NAV). 

Rydex Inverse 2x S&P MidCap 400 ETF (NYSEArca: RMS) +72.24% YTD Gain

While most people are familiar with the S&P 500, fewer are aware of the S&P MidCap 400. The latter focuses on stocks that have market values between $1 billion to $5 billion. Because of a bad market, many midcap stocks have now become small caps. Throughout it all, RMS hummed along.  

ProShares UltraShort MSCI EAFE (NYSEArca: EFU)  +63.33% YTD Gain

Over the past several years international stocks have been outperforming their U.S. counterparts. In 2008, the streak was broken and international stocks were crushed. The MSCI EAFE index is comprised of 21 country indexes outside of North America. From Europe to the Far East, no one was spared from '08's bear. 

Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) + 50.27% YTD 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 U.S. zero-coupon Treasury securities (Treasury STRIPS) with maturities ranging 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 tradeable components. Falling interest rates and investor demand for the relative safety of government bonds drove EDV's stellar performance.

Looking Ahead

Will these particular ETFs continue their strong performance into 2009? If they do, ETFguide will be among the first to tell you. And if not, we'll tell you what's taken their place.

No matter what happens, our ETF Newsletter and articles will continue to keep you informed about the market's moves and how to profit. Let no one tell you otherwise: ETFs are the right financial tools to help you capitalize on whatever lies ahead.  

Below is an excerpt from the ETF Profit Strategy Newsletter - Published on Oct.21, 2008
At the time, the Dow was above 9,000. It dropped below 7,500 and rallied into Nov./Dec