ETF Tuesday

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The Worst-Performing ETFs of 2008

Billy Fisher

It's a quick journey from top to bottom.

The worst-performing exchange-traded funds of 2008 were those that could do no wrong in previous years: Those that invest in financial services, commodities and real estate.

Bottom of the barrel: The absolute worst-performing ETF of 2008 was the ProShares Ultra Financial Fund(UYG Quote). With top holdings that include JPMorgan(JPM Quote), Wells Fargo(WFC Quote), Bank of America(BAC Quote) and Citigroup(C Quote), the fund is down 86.9% this year.

One analyst said that train wreck had been a long time in the making. "The excesses of loose credit from the '90s are still being felt today, in part, because of so-called recovery, which began in '03, was fueled by massive borrowing from other net creditor nations," said Stephen Oakes, a senior equity analyst for Oxbury Publishing. "The finance industry cut corners and invested in crafty schemes, such as subprime lending, to produce returns for stakeholders that were unsustainable in the long-run."

This macroeconomic trend has now trickled down to individuals. "To stop the bleeding, lending has dried up to such an extreme that even creditworthy applicants find it difficult to locate sources of much needed capital," Oakes said. "And we all know it takes newly created loans and additional monetary tools for businesses to support and expand an economy."

Oakes said 2009 will continue to be a struggle for this ETF. "Technically, financials are stuck in a downtrend channel that has been difficult to break," he said. "Unless upper resistance is broken, there will be more pain to come."

Real estate on the ropes: A real estate industry that faced unprecedented turmoil in 2008 led the ProShares Ultra Real Estate Fund(URE Quote) lower -- much lower. This ETF turned in a minus 82.6% showing. Its largest holdings include REITs such as Simon Property Group(SPG Quote), Boston Properties(BXP Quote) and AvalonBay Communities(AVB Quote).

This segment of the market has been engulfed in a vicious cycle with the economy contracting. "The real estate sector is driven in large part by the economy and job growth," said Royal Shepard, an analyst for Standard & Poor's. "The default rate for commercial real estate has actually been quite low, but there has been a growing concern that this might increase."

Real estate has traditionally been rich in terms of dividend yields, but more recently, firms have been tightening their belts. "A lot of companies are slashing their dividend payments to conserve cash," Shepard said. "I think this is a trend that we will see continue."

Shepard notes that multifamily REITs have held up better. "The multifamily space will continue to outperform as long as Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) remain viable entities," he said.

Green energy in the red: With a year-to-date return of minus 69.7%, the PowerShares WilderHill Clean Energy Fund(PBW Quote) proved to be a basement-dweller. The fund holds names such as Ener1(HEV Quote), First Solar(FSLR Quote) and Energy Conversion Devices(ENER Quote).

One money manager attributes part of the decline of this ETF to a repricing of risk. "Anything energy-related took a vicious beating this past year," said Matthew Tuttle, president of Tuttle Wealth Management. "Stocks that are more speculative in nature such as clean energy took even more of a hit."

Tuttle said this ETF will face adversity in the short term, but it has promising long-term prospects. "2009 is still going to be a very tough year for clean energy and the market in general," he said. "Eventually the sector will be a great place to be, since there will be a great push and focus by this next administration on clean energy."