All Better Now? Many ETFs Climb Back Near Pre-Recession Levels

by on April 19, 2010 | ETFs Mentioned:

As global equity markets plummeted in the final quarter of 2008 and first two months of 2009, many investors watched in horror as gains that were accrued over several years slipped away in a matter of months. With many major benchmarks falling by 50% or more, countless investors began to recalibrate retirement plans and risk tolerance while wondering what went wrong. Many wondered if their portfolios would ever come close to levels touched before the terms like “subprime mortgage” and “credit-default swaps” entered the American lexicon. 

Despite constant reminders that significant hurdles remain–unemployment remains at an elevated level and unprecedented stimulus measures remain in place–significant progress has clearly been made in clawing back the ground lost during the recent “Great Recession.” Since March 2009, markets have encountered some speed bumps–like Friday’s announcement of fraud charges against Goldman Sachs–but have generally headed steadily higher.

Period SPY DIA QQQQ
5/1/08 to 3/9/09 -49.8% -48.0% -45.3%
3/9/09 to 4/16/10 79.3% 73.2% 93.7%
5/1/08 to 4/16/10 -10.0% -10.0% 5.9%

After an impressive first quarter, some of the most popular U.S.-listed ETFs are suddenly within shouting distance of their May 2008 values. And surprisingly, some have burst through pre-recession already en route to multi-year highs. Recently, both the S&P 500 SPDR (SPY) and the Dow Jones Industrial Average ETF (DIA) had climbed to within 10% of their May 2008 prices, while the PowerShares QQQ (QQQQ) had actually gained back all the ground lost since then.

The gap between the performances of these ETFs is attributable primarily to the heavy tilt towards the tech sector–one of the top performing industries during the recovery–in QQQQ. A look at the nine different sector SPDRs issued by State Street over the same period shows some surprising and not-so-surprising trends as well. Predictably, the financial sector remains the furthest underwater (it’s currently about 35% below Mary 2008 levels), despite gaining more than 150% since the market bottom. Also lagging behind is the Energy Select Sector SPDR (XLE), which has rallied as oil prices rebounded over the last year but is still far from recouping all losses incurred on the way down.

Period XLF XLE XLU XLB XLI XLK XLV XLP XLY
5/1/08 to 3/9/09 -76.0% -52.3% -40.2% -56.6% -59.7% -44.1% -29.9% -29.0% -47.7%
3/9/09 to 4/16/10 170.4% 56.0% 34.6% 92.9% 114.8% 82.5% 47.7% 48.2% 114.5%
5/1/08 to 4/16/10 -35.0% -25.6% -19.5% -16.3% -13.4% 2.0% 3.6% 5.2% 12.1%

The best performers since May 2008? There are actually four sector SPDRs that are worth more today than they were almost two years ago: technology (XLK), health care (XLV), consumer staples (XLP), and consumer discretionary (XLY).

So what lessons can be learned (or what money can be made) from all of this? For investors who panicked in March 2009 and pulled their money out of risky assets, these probably are not comforting figures. But for those buy-and-holders who maintained a long-term focus, the sustained recovery has been a very welcome development, and a validation of their “stubbornness”during the freefall.

For bargain hunters, the sectors that remain far underwater–financials, energy, and utilities–may present appealing options. And for those who have bemoaned the fact that correlations between markets have shot towards 1.0 in the new environment, the numbers above may present some evidence to the contrary, as the gaps between various sectors of the U.S. economy are, in many cases, wide enough to drive a truck through.

Of course the impressive performances turned in over the last year are no guarantee that we’ll soon see the return of all-time highs. But it does make a simple yet powerful case for buy-and-hold investing.

For more ETF insights, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.