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Index Funds, Where Are We Now? (SPY, AFK, EFA)

April 7th, 2009

portfolioStaying on top of up to the minute news like President Obama’s trip to the G-20 conference or Madonna’s pending adoption of a child from Malawi can distract investors from taking a breather to look back in time in order to get a better direction of where their investments may be headed in the future. Let’s take a look at how a couple of major indexes and index funds have performed since the beginning of the year to determine if your portfolio has the right balance of risk and return.


Focus

ETF

Year to Date

U.S. Dollar PowerShares DB US Dollar Index Bullish
(NYSE:UUP)

2.7%

U.S. Equity SPDRS S&P 500 Index
(NYSE:SPY)

-7.4%

Technology PowerShares QQQ
(Nasdaq:QQQQ)

8.5%

Europe, Australia-Asia iShares MSCI EAFE Index
(NYSE:EFA)

-11.5%

Energy United States Oil
(NYSE:USO)

-8.7%

Precious Metals iShares Comex Gold Trust
(NYSE:IAU)

-1.5%

Fixed Income iShares Barclays 7-10 Year Treasury (NYSE:IEF)

-4.0%

Frontier Markets Market Vectors Africa ETF
(NYSE:AFK)

-3.2%

As of market close, April 6, 2009.

When will the correction begin?
Everyone wants to know when the economic situation will improve, but the truth is no one knows for certain. The U.S. is ending its first full quarter with President Obama and his administration in office. The call to repair the ailing U.S. economy has been met with the passage of a stimulus package. Time and the ability of businesses to serve existing and push forward into new markets will help drive the eventual economic recovery. 

The S&P 500 index, as tracked by the SPDRS S&P 500 Index (NYSE:SPY) fund, has continued to fall downward over the last year; however, this fund did start to rise in recent months as investors moved in to take advantage of low indexes in early March when the Dow Jones Industrial Average fell below 7,000 and the S&P500 went below 700. (For a complete guide, check out our Index Investing Tutorial.)

Pullbacks and Producers
Gold futures prices, followed by the iShares Comex Gold Trust (NYSE:IAU) fund, have continued to trade just under $900/oz. IAU hit as high as $91.44 on April 1, and since then has dropped about 6% to close April 6 at $85.37. The U.S. dollar index, followed by the PowerShares DB US Dollar Index Bullish (NYSE:UUP) fund, was also up for the year nearly 4% until April, but has seen a slight drop in the last three trading sessions. Investors have sought out these two investments as protectors against the uncertainty in the markets. 

Technology has jumped since the beginning of the year as top PowerShares QQQQ (Nasdaq:QQQQ) fund holdings like Apple (Nasdaq:AAPL), Qualcomm (Nasdaq:QCOM) and Google (Nasdaq:GOOG) all continued to trade in positive territory through April 6.

Frontier Markets
It’s interesting to note the performance of Frontier markets covered by funds like Market Vectors Africa ETF (NYSE:AFK) in comparison to traditional international investments covered by the iShares MSCI EAFE Index (NYSE:EFA) fund. Frontier markets include areas like South Africa, Nigeria and Morocco. Government corruption, hyperinflation and human rights abuses are a part of the story for the emerging economies of the African continent, but it is not the entire picture. Investors with a high-risk tolerance and an extended time horizon may consider doing more research in this region.

Final Thoughts
The point of this index fund exercise is a reminder to investors to constantly focus on maintaining a diversified portfolio of investments. In addition, investors should also adopt an investment process for rebalancing their holdings by selling a percentage of winning investments and reinvesting those earnings in whatever you deem important or back into the other investments in your portfolio lagging others. (Find out whether these funds can really deliver low-risk returns, read Enhanced Index Funds – Shiny Paper Or Sparkling Gift?)

Source:  By Gregory S. Davis   www.investopedia.com


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