Which ETFs Will Lead—On The Way Down?

One reader is concerned about the effects of a correction on his portfolio. This was his recent comment:

If the markets, both domestic and international should have a considerable correction, any thoughts on what asset class might have the largest drawdown? Generally, I think it’s those up the most. At this time it would seem to be emerging markets, Nasdaq tech and small cap).

The obvious leaders on the way down will be all leveraged funds, such as the ProFunds Ultra series and yes, those that have gained the most.

From my vantage point, those ETFs with the greatest DrawDown (DD) during the fairly minor corrections since the low of March 9, 2009, will be the ones to watch.

In regards to Country ETFs, here are the top five with the Max DD% (not shown in the StatSheet) in parentheses:

Russia (RSX: -30.21%), India (IIF: -27.03%), Emerging Europe (GUR: -24.25%), Turkish Investment Fund (TKF: -18.86%) and Asia Index (ADRA: -18.25%).

Looking at sectors, here are the top five from that arena:

Natural Gas Fund (UNG: -52.59%), Internet Infrastructure (IIH: -30.61%), Regional Banking (KRE: -26.50%), Homebuilders (XHB: -24.10%) and Metals & Mining (XME: -23.56).

Of course, some of these (not UNG) also have moved up the most, so if you work with my recommended 10% trailing sell stop in these areas, you should be able to lock in most of the gains once the downside comes into play.

Along these lines, some readers have emailed and asked if it would be wise to take profits now or at least reduce exposure. To me, that would be making an emotional decision based on what might or might not happen. The purpose of trend tracking is to stay in the market until the trend comes to and end and starts to reverse.

That’s when your trailing sell stops will indicate that’s it’s time to step aside and move to the sidelines—and not before.