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3 ETFs for the Bear Market Rally

3 ETFs for the Bear Market Rally
By Ron DeLegge, Editor
July 23, 2009

SAN DIEGO (ETFguide.com) – Cash is king, cash is king! No it isn’t. Cash is not king! Cash is trash! Which is it?

With the Dow Jones Industrial Average (NYSEArca: DIA) rallying past the 9,000 point mark, the performance of stocks has indeed thrown investor’s a curve ball of epic proportions.   

“There’s no reason for stocks to be rising,” they can be heard saying. “Earnings are a lot worse than they’re reporting,” they add. “We’re still in the midst of the worst economic recession of our generation,” others correctly observe. “Gold (NYSEArca: GLD) is going to the moon and everything else will be worthless,” argue the conspirists. 

Meanwhile, major stock indexes have ignored all talk and rallied around 40% over the past five months.

I know it was ancient history, but do you remember when the Dow was at 6,400 in March? The Wall Street Journal ran an article making a case for why the Dow could go to 5,000. Instead of complying, stocks decided it was time for something else. The very things people expected to happen simply haven’t played out.    

Here are three ETFs for today’s bear market rally:

Technology Select Sector SPDR (NYSEArca: XLK)
With $2.8 billion in assets, XLK is one of the largest technology ETFs. The fund’s performance and yield is linked to tech stocks within the S&P 500. Positive second quarter earnings from Apple and Intel have lead the tech sector higher despite disappointing results from others within the group. XLK includes 79 holdings and Microsoft, IBM and AT&T are among the three top holdings.

Year-to-date, technology stocks have been the best performing sector within the S&P 500. XLK has gained 26.99% and currently carries a yield in the vicinity of 1.59%. In 2008, XLK declined 41.39% and the fund’s annual expense ratio is 0.21%. 

iShares MSCI Emerging Markets ETF (NYSEArca: EEM)
EEM contains around 329 stocks focused in countries still in the midst of reaching economic maturity. The fund’s index is designed to measure equity market performance in the global emerging markets. Top country holdings are: South Korea, China, Brazil, Taiwan, Russia, South Africa, and Mexico.

As a high beta asset class, emerging market stocks have rallied more than stocks from developed nations. They can also fall faster too.

Year-to-date, EEM has gained 39.58% and currently carries a yield in the vicinity of 1.80%. In 2008, EEM declined 50.01% and the fund’s annual expense ratio is 0.72%. 

Direxion Daily Small Cap Bull 3x Shares (NYSEArca: TNA)
This particular leveraged small cap fund attempts to triple the daily performance of the Russell 2000. The index follows stocks with market sizes or capitalizations generally between $250 million to $3 billion. TNA was launched last November and has $230 million in assets.

Even though leveraged and short ETFs have gotten a bad rap, their undesired results are mainly attributable to their mis-usage or mis-application. Here’s what you need to remember: Because leveraged and short ETFs are shooting to replicate the daily performance of their benchmarks, they are best suited for investors or traders with a super-short term investment time horizon.
 
Year-to-date, TNA has fallen by 9.52% but over the past three months it’s gained around 35%. TNA’s annual expense ratio is 0.95%.

How will you react?
The ETFs listed above have been beneficiaries of the latest bear market rally. The stock market has gone up, but they’ve gone up even more. If the market continues to rise, these funds will likely lead the charge ahead. While no one knows what will become of the current bear market rally, it would be a supreme mis-judgment to assume its run is indefinite or that its ceiling is infinity.

Many leading economists and Wall Street analysts have already mis-concluded that the “worst is over.” Unsuspecting investors have already joined them by assuming more risk in their portfolios. Are you one of them?

Hopefully, you’re taking the necessary steps to prepare your money for the stock market’s next big move. No doubt, the investing masses will miss this window of opportunity, as usual. Don’t be one of them!

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