Economic Sector ETFs Versus Sub-Sector ETFs in the 2008 Collapse

By some measures, it wouldn't matter what you invested in. Mr. Market 2008 has punished all stock assets harder than a Justin Tuck body slam to an opposing team's quarterback.

On further review, however, diversification across an economic segment lessened the negative impact on portfolios; specifically, ultra-narrow ETF sub-segments were dropped for more severe losses than those suffered by broader sector investments.

For instance, over the last 2 months, the transportation sector (e.g., trucking, railroads, shipping, air freight, etc.) performed on par with the broader S&P 500. Meanwhile, the sliver that is shipping alone found itself in a world of serious pain.

Consider the chart below. The Dow Jones Transportation Fund (IYT) hardly deviated from the bearish mauling to stocks at large. In contrast, with the Claymore Global Shipping Fund (SEA) limited to the "waters," it sank like an easy-to-take-out battleship. (50% in a matter of months!)

Granted, global shippers aren't major holdings in the U.S. index of transporters. Nevertheless, all shippers engage in the narrow area of transportation. It follows that SEA's dismal showing demonstrates what can happen when your focus is exceptionally narrow during a crash/collapse/bear.

But wait... there's more. It's no secret that energy investing has been mutilated. In particular, the Global Energy Sector (IXC) has lost 25% in 8 weeks. Like the Transports (IYT), however, the broader energy fund was "in line" with the S&P 500's fall.

What happens when you look at the 8-week performance of the once-promising Market Vectors Global Alternative Energy Fund (GEX)?  The losses escalate to -52%. (It's a little better for a 2-month period.)

There's a simple concept that I am trying to pass along here; that is, the narrower your focus, the greater your downside risk. Alt energy is a sub-set of energy, so it will carry more risk on the downside.

On the flip side of the football coin, narrow ETFs like the Global Shipping Fund (SEA) and the Market Vectors Global Alt Energy Fund (GEX) may stand to benefit more in a raging bull. In that manner, it comes down to how aggressive you truly are and how many knock-downs you can really withstand.

Note: In the past, I've identified similar discrepancies between single country ETFs and regional ETFs. (Click here for a performance assessment of regional ETFs and country ETFs.) 

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