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Review: Best ETFs So Far in 2008

Billy Fisher

With the price of crude hovering around $130 a barrel and inflation fears beginning to surface, this trend is not a shocker. Challenging conditions have made for a market in which only 12.1% of all ETFs have even seen price appreciation of 5% or better in the first two quarters of 2008.

Year to date, there has been no better ETF than the United States Natural Gas Fund(UNG). The fund, which uses futures contracts to track the price of natural gas, has surged 60.9% since the beginning of the year. This sharp move higher has surpassed even that of oil.

"Oil rallies last year were significantly greater and independent of natural gas, a phenomenon not too common since both come from the same hole in the ground many times," says Morris Glasgow, Managing Director and Portfolio Manager for Sterne Agee Investment Advisors. "Now the gap to oil has been somewhat filled."

Glasgow thinks that natural gas will trend higher over the long run, but this ETF could be reaching a short-term plateau.

"We would expect over the coming summer months of 2008 that UNG may take a breather," he says. "And if oil prices reverse course to any degree, speculators may drop the position to protect profits, or go the other side of the trade. Though long-term trends suggest natural gas -- and therefore UNG -- may rise in value over the next decade, as demand is significantly greater than supply replacement."

A Black Gold Rush

With soaring oil prices, one might expect that oil-related ETFs have done reasonably well this year. The United States Oil Fund(USO) is up 41.1% thus far. Similar to that of UNG, this ETF uses futures contracts to track the price of light, sweet crude oil.

The narrow focus of some commodity ETFs has been instrumental in returning strong short-term gains.

"Top performing funds tend to be the most concentrated," says Ron DeLegge, editor of ETFGuide.com. "With USO, there's no surprise there. As long as crude continues to appreciate, then clearly it will be a huge winner."

Although oil has been a clutch performer so far in 2008, DeLegge believes that individual investors might be better served by ETFs with a wider focus than USO. One of the names he likes is the iShares S&P GSCI Commodity-Indexed Trust(GSG), which is up 34.0% year to date. The fund tracks 24 different commodities, with approximately two-thirds of the fund weighted in energy.

"It's a nice way for people to get diversification as well as exposure to commodities," he says.

DeLegge also likes the PowerShares DB Commodity Index Tracking Fund(DBC), which tracks the Deutsche Bank Liquid Commodity index and is up 36.0% so far this year.

"These funds are probably a better choice than going with a highly speculative, highly focused ETF that bets on just one commodity," he says.

Room to Run?

Given the first-half surges that have been seen from oil and commodity ETFs, this momentum is likely to continue.

"USO has been a great performer and is still in an uptrend," says Marvin Appel, CEO of Appel Asset Management. "I don't expect oil prices to get cheap ever again, but I'm also not betting on the price of crude rising by $40 a barrel over the next six months, as it has during the first six months of the year."

One drawback that Appel sees with investing in USO is its associated cost of carry, which has the potential to prevent the fund from achieving gains that are commensurate with those of crude. He does like the SPDR S&P Oil & Gas Exploration & Production ETF(XOP), which is up 27.7% so far this year.

The fund has holdings that include Exxon Mobil(XOM), Chevron(CVX), ConocoPhillips(COP), Devon Energy(DVN) and Apache(APA).

"It's functioning like a mid-cap oil ETF because it's equal-weighted," Appel says. "It's an excellent long-term play on energy and has no cost of carry."

Overall, Appel has a bullish long-term outlook on energy. "Energy is going to be a rich sector for decades to come," he says.