6 Fat-Tail ETFs That Whipped Mutual Funds in 2008

• By Max Rottersman
• On 10:59 am EST, Wednesday January 28, 2009

HANOVER, NH (ETFguide.com) - The mutual fund performance spectrum has been shrinking, squeezed by new high-def, digital-age funds.  They're called exchange-traded funds (ETFs) and they've been beating fund managers as easily as Deep Blue from IBM dispatches chess grand-masters.

Representing actively managed funds, Leuthold's Grizzly Short Fund (Nasdaq: GRZZX - News) finished with the best return last year, 74%.  But it was no match for short-NASDAQ 100 funds from Rydex, Direxion and ProFunds.  These mutual funds were at the top in 2008: Rydex Dync Inverse Nasdaq-100 2X Strategy at 87%: (Nasdaq: RYVNX - News), Direxion NASDAQ-100 Bear 2.5X at 84%: (Nasdaq: DXQSX - News), and ProFunds UltraShort NASDAQ-100 Inv at 81%: (Nasdaq: USPIX - News). 

Yet those mutual funds couldn't keep up with the triple-digit returning ETF, UltraShort Semiconductor ProShares at 113%: (NYSEArca: SSG - News).  That was followed by the UltraShort Technology ProShares at 98%: (NYSEArca: REW - News), UltraShort Russell MidCap Gr ProShares at 96%: (NYSEArca: SDK - News), UltraShort Russell1000 Growth ProShares at 83%: (NYSEArca: SFK - News), UltraShort Industrials ProShares at 80%: (NYSEArca: SIJ - News), and UltraShort QQQ ProShares at 77%: (NYSEArca: QID - News).

Here is a visual picture of the fund return spectrum for both mutual funds and ETFs

The graphs above show all fund returns from left to right.  The height of each bar indicates the number of funds in its performance range (there are 100 ranges).   In both groups, most funds fell between negative 27% and negative 40%.  Mutual funds cling together in a near-normal distribution.  ETFs have what is called a 'fat tail.'  There are a significant number of ETF returns at the high end of the performance line.

The standard deviation for mutual funds is 13%.   One standard deviation means 68% of all funds have returns of 13% plus or minus the median.  In other words, most funds returned between negative 51% and negative 25%.

ETFs have a standard deviation of 27%, almost double that of mutual funds.  Sixty-eight percent of their returns range from negative 65% to negative 11%.  

The worst performing ETF in 2008 was the Ultra Financials ProShares at -85%: (NYSEArca:UYG - News). The worst performing fund, not surprisingly, was one that mirrored the best performing funds (tech short) in the other direction, ProFunds UltraSector Mobile Telecomm Inv at -89%: (Nasdaq: WCPIX - News).

The worst performing, large growth, actively managed mutual fund, which some hapless soul probably had in their IRA account, was the Touchstone Large Cap Value (Nasdaq: TLCAX - News). It breezed in at negative 74%. Amazing what a manager of a mutual fund can do when he puts his mind to it. John Schneider's bio on Yahoo Finance reads, ' Schneider founded JSAM in March 2005 and serves as its President and Chief Investment Officer. From 1998 to 2005, he was a portfolio manager with PEA Capital LLC, where he managed two mutual funds with over $10 billion in assets. He has over 20 years of investment experience.' In other words, professional driver, closed course. We get it.

If you worry that you, too, may not be safe in your domestic large growth equity fund, see how your funds are doing at FundAnalyze.com. There are hundreds of inexpensive, lower risk funds and ETFs to choose from and we can help you to locate them.

Forester Value (Nasdaq: FVALX - News) delivered a stunning positive 0.39% return. But to prove just how sour the public has turned on actively managed funds, it has only $60 million in assets.  They can barely pay the rent.  Many ETFs, on the other hand, have been able to raise $60 million in assets within weeks of being launched.

Active managers can't deliver the best returns in the market, but they can certainly come close to the worst.

Max Rottersman is a principal of Hanover Technology Group, LLC. His opinions don't necessarily represent the views of ETFguide.com or Yahoo Finance.

Buzz up!