The Best ETFs of 2008

The year 2008 made for a wild ride in the race for the best exchange-traded fund of the year.

Just how volatile has the year been? Consider this: At the midway point in this race, June 30, the United Stated Natural Gas Fund (UNG Quote) had established a strong lead with a year-to-date return of 73.7%, and the United States Oil Fund (USO Quote) was up 46.9% at the half-way point. Fast-forward six months, and these two funds are now actually down 33.4% and 57.7% on the year as commodity ETFs have suffered quite the pullback.

Of the 857 ETFs tracked by Morningstar, only 66 are in positive territory; and 24 of the top 25 ETFs are, not surprisingly, inverse, or short, ETFs.

And the Winner Is ...

The top-performing ETF of 2008 with a year-to-date return of 98.9% is the UltraShort Russell MidCap Growth Fund (SDK Quote). The fund is designed to deliver returns equal to twice the inverse of the Russell Midcap Growth Index which includes top holdings such as Yum! Brands (YUM Quote), Express Scripts (ESRX Quote) and St. Jude Medical (STJ Quote).

So what lead to this ETF's breakaway performance? "Mid-cap growth stocks generally have more beta than the S&P 500, which would enhance the return or decline versus the S&P 500," said Tony Welch, a portfolio manager at Sarasota Capital Strategies, who specializes in ETFs. "In addition, mid-sized retail, banks and consumer-discretionary stocks have been hit particularly hard in this economic downturn."

Welch believes 2009 could be a better year for mid-cap growth stocks. "The bad economic numbers will be with us for some time, but markets usually turn before the economy does," he said. "The Russell Midcap Growth Index is heavily weighted toward the consumer and the huge fiscal stimulus plans, if implemented, should be very good for mid-caps."