ETF Expert

If it's not one thing, it's another. The credit crisis is finally coming under control. Good news… right?

Unfortunately, the recession/depression fears have sent the CBOE Volatility Index (^VIX) back up to a stratospheric 70. What's more, world stock markets retested previous October lows; the S&P 500 is down a colossal 39% YTD!

The latest culprit? Commodities. Real and overstated demand destruction have caused natural resources prices to fall precipitously.

Even worse than the underlying commodities, companies engaged in exploration, acquisition and distribution have been brutalized. How bad is it?

Steel companies in the Market Vectors Steel Index Fund (SLX) dropped about 16% Wednesday and fell 70% over the last 6 months. Those numbers are comparable to the collapse in networking stocks of the dot-com bust!

It's not much better for the more diversified miners. The S&P Metals and Mining Index Fund (XME) gave up nearly 19% in a single session, and blew up by 65% over the last half year. Gold, silver and copper may be down, but spot prices are not quite as bad off as company share prices.

Oil and gas explorers in the SPDR Oil/Gas Exploration Index Fund (XOP) crumbled 15% by the ringing of Wednesday's bell, shedding more than 52% since 4/23/08. Even the slightly more diversified iShares Goldman Sachs Natural Resources Fund (IGE) is down 50% in the last 6 months.

Granted, few would argue against the longer-term desirability of resources in an ever-growing world. Heck, human beings fight wars over resources.

Yet the idea of taking a long-term view has been a tough proposition. After all, if you've been incrementally buying into energy or metals or materials, you've only gotten hammered.

Consider the chart below. With the S&P 500 battered by financials all year long, the media focused heavily on what was still working. And for a while, commodities were still in style; oil was near $150 per barrel in June.

By July/August, however, the last bubble had burst. It wasn't housing. it wasn't the financial system's house of cards. It was the commodity balloon.

Not only did spot commodity prices get pounded, but metals, mining, materials and oil companies found themselves in a massive hole. And nobody can tell you how long it'll take to get out of the pit! 

Stop-losses kept me out of big losses in materials, minerals, oil and gas. Moreover, even the attractive "fundamentals" can't lure me back to a sector that is rising or falling by 15%-20% daily. When there's a greater sense of sanity… perhaps when the CBOE Volatility Index drops below 40 and is heading for 30… I might take a gander.

For now, though, I am only nibbling at preferreds, like JP Morgan Chase Z Shares (JPM-Z) and Constellation Energy Preferred A (CEG-A). Preferred shares are much further down on the risk scale than common stock.

The best ETF for a diversified approach? Take a look at the iShares Preferred Index Fund (PFF). Read more about PFF in this article here.

As far as the stock ETF world goes right now, it requires a leap of faith. For instance, Warren Buffett declared recently that he is buying American stocks right now. If you have Buffett-like conviction, you might grab a piece of his holding company Berkshire Hathaway (BRK.B).  It has all of the features of an ETF, and its long-term track record is unparalleled.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.