Best Exchange Traded Fund for 2008

With over 700 Exchange Traded Funds (ETFs) as of early July 2008, valued at over $580 billion, choosing the best one for 2008 is pretty much an impossible task. By 2010, ETFs are expected to exceed $1 trillion in value and will probably be well over 1,000 in number, and this is only in the United States.

If we were to take the top 50 investors, brokers, ETF or fund managers and ask them to choose the best ETF for this year, we would undoubtedly get 50 different answers. If it were easy to choose a best ETF, everyone would be buying that fund.

There are two ways to approach finding the best ETF. One is to look at the broad market and determine which industries or sectors are likely to do best this year. The other is to look at the ETF manager, if it has one, and pick someone with an excellent track record.

It is also helpful to eliminate sectors that are not likely to do well in 2008. In these I would include just about anything to do with housing, mortgage lending, financial institutions of any kind, and construction companies.

In spite of the administration and banking apologists assuring us that the worst is past and the economy is recovering, the fact is there is still a lot of pain ahead. The housing bubble has not yet fully deflated. Housing prices will continue to go down. Foreclosures will continue to go up. Inventory will continue to go up. Construction will continue to go down.

The government has a list of 90 banks that are potentials for going bust. IndyMac, the recently failed bank in California, was not even on that list. In spite of the administration’s attempt to bail out these banks, including the huge Fannie Mae and Freddie Mac, there will be many failures and the government will run out of bailout money at some point. Keep in mind that we are going to pay for those bailouts and the crooked bankers will get off Scott free and smelling good.

Stay away from housing and financials. As of mid-June, 12 of the 20 worst-performing ETFs focused on the financial-services industry.

As the economy crumbles toward oblivion, what sectors or industries are likely to actually gain in value? As the dollar heads toward the value of the paper it is printed on or less, how will investors survive?

Commodities. When you think of commodities, do you think of “Trading Places,” with Dan Akroyd and Eddie Murphy? In that movie, the commodity was orange juice. In addition to agricultural and animal products, there are the hard assets. These include energy, base and industrial metals, precious metals, silver products, and forest products. Recently added to that list would be alternative energy and even water. Some precious metals, especially silver and platinum, also have industrial applications.

If you are going to find the best ETF, you need to know who to listen to. That means you probably should ignore just about every economist and investment “expert” on the mainstream media outlets. For the most part, they either have an ax to grind (have a relationship with companies they are pushing) or they simply don’t know what they are talking about.

In early 2007, Peter Schiff (“Dr. Doom”) was on Fox news with three other economists or pseudo-economists. All three, including Ben Stein, were arguing with Peter about the housing market. Peter said it was going to crash. The others said it was going to keep going up. One said it was going to go up 10% in 2007. Ben Stein was quite shrill in his certainty that Schiff was wrong.

Need I say that those same people are still giving out their advice on investing?

So the best ETF in 2008 will be in the area of commodities. Your choices in commodity ETFs is huge. A decision must be made as to whether you want a broad diversity of commodities or you want to specialize in a sector, like energy or precious metals.

The best ETF in the agribusiness area is probably Market Vectors Global Agribusiness (MOO). This ETF invests in many areas of agribusiness including crops themselves as well as supporting businesses (John Deere and Mansanto). It also invests internationally.

In the precious metals arena there is the SPDR Gold Shares ETF (GLD), which has a year-to-date yield of 13.6%. The iShares COMEX Gold Trust (IAU) has a YTD yield of 13.2%. PowerShares DB Gold (DGL) is up 11.5%. In silver, there is the iShares Silver Trust (SLV).

If you want to follow more than the price of one metal, you could go for PowerShares DB Precious Metals (DBP) or Market Vectors Gold Miners (GDX). In some ways, the base metals are outperforming the precious metals because of China and other emerging nations’ lust for building materials. Check out PowerShares DB Base Metals (DBB). This includes the hot commodity aluminum and others.

After all of that, what is my recommendation for the one hottest ETF for 2008? Probably the biggest name in commodities is Jim Rogers. Rogers is based in Singapore where he lives with his wife and two daughters. They are being taught Mandarin. Rogers has his own commodities ETFs. I recommend the latest, the Rogers Van Eck Hard Assets Producers Index (RVEI).

This index includes the hard assets mentioned above and supporting industries. It also includes companies from 39 countries. Rogers is one of the best commodities market predictors of our time. As the US economy continues to go downhill, investing in an ETF that is both a commodities ETF and also an international investment seems to make a lot of sense.

The talking heads are saying that the commodities are in a bubble and the bull market in commodities is over. There will be corrections in commodities and there have been. But the bull market is far from over. The need for food and energy will not go down. And precious metals as a hedge against a swooning dollar is still smart investing. Remember, these guys calling for a commodities bubble are the same ones who didn’t see the housing bubble coming.

Do your own due diligence before risking any investment. I own SLV, GLD, and GDX. I have sold SLV shares twice and GLD shares once for good profits. On the last correction, I bought back in to both ETFs. I do not own RVEI at this point.