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Can Laggards Become Leaders?

Can Laggards Become Leaders?
By Ron DeLegge, Editor
January 13, 2010

SAN DIEGO ( Ė Can last yearís investment laggards become this yearís leaders?

Letís look at some of the 2009ís worst performing ETFs and see if thereís light at the end of the tunnel.

U.S. Natural Gas Fund (NYSEArca: UNG)
While 2009 was good for most commodities (NYSEArca: GSG), it wasnít a good year for natural gas. Prices fell around 50%. Adding to the pain were share shortages, operating difficulties and regulatory issues that put pressure on commodity focused funds like UNG.

UNGís performance is linked to natural gas delivered at the Henry Hub in Louisiana. The trust charges 0.97% in annual expenses.

PowerShares Dynamic Banking ETF (NYSEArca: PJB)
Can carefully selecting stocks within a beaten up industry sector produce outperformance? While it sounds good, the strategy didnít work for the PowerShares Dynamic Banking ETF in 2009. PJB fell 22.76%. The fund holds a small basket of 30 U.S. bank stocks. Companies are selected using quantitative factors including fundamental growth, business valuation, investment timeliness and other risk factors. Stocks are then assigned a modified equal weighting and rebalanced each quarter.

Other bank ETFs lost money in 2009, but not nearly as much as PJB. For example, the SPDR KBW Bank ETF (NYSEArca: KBE) declined just 1.45%. Financial stocks (NYSEArca: XLF) within the S&P 500 climbed 17.50%, but since they include brokers, insurers and specialty finance companies they arenít a banking pure play. Over the past three years PJB has lost 47.46% compared to a 59.44% loss for KBE. PJBís annual expenses are 0.60%.

iShares Barclays 20+Yr Treasury (NYSEArca: TLT) 
During 2008ís credit storm money flooded away from corporate and mortgage debt into U.S. government bonds. As a result, TLT racked up a 33.75% gain. But 2009 was a different story. The appetite for investment risk by investors returned in a big way and TLT lost 21.49%. High yield bonds (NYSEArca: JNK), emerging market stocks (NYSEArca: VWO) and midcap stocks (NYSEArca: MDY) were favored over lower beta assets. 

TLT follows the Barclays 20+ Year U.S. Treasury Index, which includes all publicly issued U.S. Treasuries that have a remaining maturity of more than 20 years, are non-convertible and are denominated in U.S. dollars. TLTís yield is around 3.90% and it charges annual expenses of 0.15%.

Direxion Daily Emerging Markets Bear 3x Shares (NYSEArca: EDZ)
Emerging market stocks were 2009ís biggest winners, so itís no surprise that EDZ would be a horrible performer by posting a miserable 92.50% loss. EDZ attempts to triple the inverse daily performance of the MSCI Emerging Markets index. That means if the index gains 1% on any given day, EDZ should fall by 3%.

Going forward, EDZís poor showing in 2009 could quickly reverse itself if emerging market stocks have a pullback. EDZ charges annual expenses of 0.95%.

Does investing in last yearís laggards work? While it doesnít always produce gains, at times it can. For example, some of 2008ís worst performing categories like emerging market stocks, junk bonds and small stocks turned out to be among 2009ís best performing areas.

Sometimes it pays to take a second look at unloved and out-of-favor investments. Who knows, an eventual turnaround could reward you.

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