Tuesday, June 17, 2008

Gimmick ETFs don't pan out

Last year I was optimistic about two of Claymore's new ETFs: The Claymore/Clear Spin-off ETF (CSD), and the Claymore/Sabrient Defender ETF (DEF). I had already given up on them by the end of 2007, but I'd like to revisit them once more to emphasize an important point.

The Spin-off ETF (CSD) has an interesting strategy of investing only in recent spin-off companies. The idea is that these companies are often under-valued at the beginning when index fund managers are forced to dump these mid- and small-cap shares from their large cap index funds. Unfortunately the performance has been unimpressive, especially since the current bear market began.

On the other hand, the Defender ETF (DEF) was supposedly ready-made for a bear market, as its name implies. This ETF adjusts its holdings every quarter, and tries to pick the stocks which will perform the best on days when the market goes down. It's a nice idea, but as the chart below shows, DEF has fallen in almost perfect lock-step with the S&P 500.

So much for "defending."

The bottom line is that we shouldn't expect specialty stock ETFs to beat the market in the long run. As far as I'm concerned, buying and selling a broad ETF at the right time is far more effective than trying to cherry-pick stocks for a buy-and-hold strategy.


adventurerneil said...

What do you think about SPY as a way to index? I'm considering maybe dollar cost averaging it at some point, but it just doesn't seem worthwhile right now with other investment opportunities...

Jody said...

SPY is my 3rd favorite way to index right behind SDS and SSO. Today I'm 100% in SDS because I think further declines are ahead in this bear market.