ETFs That Are Ailing Because of Europe

NEW YORK ( ETF Expert) -- When subprime crisis concerns came to the fore in 2007, the U.S. had to throw all kinds of spaghetti at the wall before noodles began to stick.

For instance, the Federal Reserve first slashed interest rates. Later, in March of 2008, the Fed and JPMorgan Chase ( JPM) orchestrated a buyout of Bear Stearns. In September, the Securities and Exchange Commission banned the short-selling of financial companies.

Still, nothing stuck.

The government decided to try a different path by letting Lehman Brothers go bankrupt. Was Bear Stearns too big to fail, while Lehman Brothers was not? The government had exacerbated the uncertainty.

Congress passed TARP to buy toxic assets. The only problem was the government didn't buy toxic assets but chose to purchase preferred shares of the financial institutions instead. More uncertainty.

Eventually, the Fed ushered in the era of quantitative easing which allowed for the purchase of unwanted mortgage-backed securities; eighteen bearish months passed before confidence returned.

OK, so that wasn't a top-notch historical review. Yet the point is that the smartest people in the world struggled to instill confidence in the financial system from October 2007 to March 2009. And although the sovereign debt crisis in Europe today may not represent the same set of circumstances, dismissing the similarities outright may be detrimental.

Consider the extraordinary level of volatility in the past week. Granted, computerized program trading deserves some blame. Indeed, we can even chastise the "evil" hedge fund players and the insidious short-sellers.

On the other hand, the same thing could have been said about the volatility during the 2007-2009 bear market. Was there no reality in the problems that existed at the time?

Some of the worst-performing exchange-traded funds during the 2007-2009 bear market included the SPDR KBW Bank ( KBE), iShares DJ Home Construction ( ITB) and iShares Russell MicroCap ( IWC).

Subprime/Alt A mortgage exposure at financial companies decimated bank shares. Oversupply and negligible demand killed the homebuilders. And a deep recession rocked the smallest companies more than the larger companies, as smaller companies had even less access to credit. In other words ... it wasn't all due to market manipulation. (Even if market manipulation is 100% to blame, investors may not have the luxury of avoiding capital markets altogether.)

It follows that we may certainly attribute the ridiculous volatility to mechanized trading/opportunistic hedgies/"dark side" short-selling. However, there are genuine reasons for the selling pressure as well.

Here, then, is a list of ETFs that have taken the biggest hits, along with the performance of the ETF that tracks the S&P 500, for comparison purposes. The names shouldn't surprise you. Most of them represent the areas with the most exposure to the eurozone debt disaster.

Exchange-Traded Funds That Tanked Over Past Five Trading Sessions
  • iShares DJ Regional Banks (IAT) -9.3%
  • SPDR KBW Bank (KBE) -8.8%
  • SPDR Emerging Europe (GUR) -8.7%
  • iShares DJ Home Construction (ITB) -8.3%
  • Market Vectors Poland (PLND) -7.6%
  • iShares MSCI Turkey (TUR) -7.2%
  • iShares MSCI Austria (EWO) -5.1%
  • iShares MSCI Germany (EWG) -4.9%
  • SPDR S&P 500 (SPY) -1.6%

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Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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