ETF Risk: The Riskier The ETF, The Larger the Gain
29 October 2009 at 3:58 pm by Gary Gordon
“So begins another 7% decline,” said Jim Cramer after Wednesday’s 10/28/09 close. However, I must admit, I was a bit confused when I read the tid-bit on CNBC.com.
You see, the S&P 500 and the Nasdaq had already fallen 5.0% and 5.4% from their closing prices on 10/19/09… more than a week earlier. Heck, the small-cap benchmark, the Russell 2000, has dropped 9.2% from 2 weeks prior.
So was Mr. Cramer merely talking about the Dow 30 Industrials going down… after it had fallen -3.5% from its perch? If so, I’m not sure I would describe a “decline” as having just started… not when you’re already halfway through an activity.
If I had the time or the inclination, I’d find out how Cramer would spin the 2% surge higher on Thursday’s 10/29/09. But alas, I’ll leave the “Mad Money” recap to other writers.
What occurred to me is this… the major indexes are behaving the way one would expect in a pullback. And that’s a good thing.
In contrast, during the 10/09/07 – 3/09/09 bear period, the Dow (DIA), S&P 500 SPDR Trust (SPY) and Nasdaq 100 (QQQQ) all experienced about the same percentage loss. Liquidation of all equities occurred regardless of historical risk. In fact, losses on the tech-heavy Nasdaq were no harsher than the historically less volatile Dow.
What I find encouraging about the correction/pullback/sell-off of late October 2009 is that riskier assets went down harder; the Dow went down -3.5%, the S&P shed -5.0% and Vanguard Emerging Markets (VWO) gave back -8.7%.
Similarly, on a celebratory day like 10/29, the Dow gained 2.05%, the S&P gained 2.25%, the Russell 2000 gained 2.45% and Vanguard Emerging Markets (VWO) picked up 4.25%. Risk is as risk does.
I’m not saying that the 1-day turnaround means that the correction is necessarily over. The pullback’s depth and duration depend entirely on the movement of the U.S. dollar. But I am saying that it’s important to see risk-reward relationships returning to an “old normal.”
If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.
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Tags | "correction etfs", "Cramer etf", "etf decline" "etf dow", "etf nasdaq", "etfs correction"
