Right now, in the wake of MSCI’s reclassification of Israel as a developed market, I’m working on a rundown of the country classifications of four major index providers: MSCI, Dow Jones, FTSE and Standard & Poor’s.

The evolution of emerging markets (and sometimes devolution of developed markets—see Greece, which could lose developed-market status in the FTSE indexes) is just particularly fascinating to me. Take some of the frontier/emerging markets that the index providers cover at the very bottom rungs of the investability ladder: Latvia? Slovakia? Trinidad & Tobago? Mauritius?

Frankly, I’m dying to know what the investment stories are behind these tiny, tiny markets. And while I believe frontier markets (like, say, Vietnam) offer some awesome investment opportunities, is anyone really itching to sink some funds into an obscure eastern European country that probably has a smaller population than the number of visitors to my local mall on the day after Christmas?

I realize there are different rules and methodologies that each of the index providers use, but it all seems rather mysterious. For example, Dow Jones—which generally uses the International Monetary Fund’s designations—classifies Slovenia as a developed market, while MSCI has it labeled as a frontier market. That’s quite a disparity.

Lately, the majority of the focus has been on Israel and South Korea, though, and whether they will transition to developed-market status within the various classification systems. MSCI, of course, just promoted Israel to developed status last week, while keeping Korea in the emerging category. Given that the majority of internationally invested funds are benchmarked to MSCI indexes (at least in the U.S.), this issue has been followed fairly closely by investors. At the end of March, Israel was the ninth-largest country in the MSCI Emerging Markets Index, with a 4.0% weighting, and South Korea was the fourth-largest, with a 12.4% weighting.

Given the amount of money benchmarked to that index and the even greater amount benchmarked to the MSCI EAFE Index, which Israel now joins, that’s an awful lot of funds shifting around. South Korea is up for reconsideration in 2010 (as is Taiwan, another country straddling the emerging/developed divide).

But MSCI seems to be on the tail end of the trend: Dow Jones, S&P and FTSE all classify South Korea as a developed market, while only Dow Jones and FTSE put Israel into the developed bucket. S&P still has Israel as emerging. Of course, FTSE, S&P and Dow Jones have a lot fewer funds tracking or measured against their global indexes.

They can shift their country classifications with relative ease, as they deem appropriate, without a lot of reverberation. But if MSCI decides to promote a country to developed status, many, many billions of dollars are going to be moving around, with all sorts of economic consequences.

And not all of them will be positive: In Israel, there is concern that the country moving from relatively big-dog status in the emerging markets index to a minor position in the developed markets index will actually result in outflows from the local stock market.

(Read an article on the latest MSCI moves here. Also of interest might be a Bloomberg article on the subject here, and another article from an Israeli publication about a Deutsche Bank study on the potential negative impacts of the switch.)

Teva Pharmaceutical, Israel’s largest company, saw its price spike in June shortly before the official MSCI announcement, but there’s no telling what the longer-term effects will be. It will be interesting to see what happens with that, and even more interesting to compare the outcomes with what happens when South Korea—and its big stock, Samsung Electronics—is finally promoted to developed status.

Yeah, that was definitely the unrepentant nerd talking …

Mike Bayer considers himself a contrarian investor.

In the past few months, as stock markets soared, that sort of go-against-the-grain approach has taken center stage.

The Toronto, Canada-based adviser and president of Strategic Analysis Capital Management says he prefers to buy exchange-traded funds and mutual funds from Dimensional Fund Advisors when they’re out of favor.

“The problem most investors have is that they tend to trade too frequently and make changes in the wrong direction. They’re buying high and selling low,” said Bayer, who works with individual and institutional clients in Canada and the United States.

Since early March, SACM has been taking advantage of the rally in stocks to rebalance client portfolios. Bayer has been trimming positions in the Vanguard Emerging Markets Stock ETF (NYSE: VWO).

“Emerging markets have had a big run-up in the past few months,” he said. “I’ve been carefully monitoring portfolios to make sure they stay within our asset allocation limits. In cases where VWO has exceeded those bands, we’ve sold positions and redeployed proceeds into mainly bond funds.”

The proceeds from selling VWO have been mainly going into buying more fixed-income ETFs and funds, says Bayer. Those include the iShares Barclays TIPS Bond ETF (NYSE: TIP) and the iShares Barclays 1-3 Year Credit Bond ETF (NYSE: CSJ). The firm has also been adding to positions in the DFA Five-Year Global Fixed-Income Fund (DFGBX).

Typically with fixed-income portfolios, Bayer will allocate about a third to DFGBX, another third to CSJ and the remainder in TIP.

“Usually, we’ll use a band of about 5% to determine when to make changes,” he said. “But that’s not a hard-and-fast rule. If someone’s in a taxable account, we’ll customize our rebalancing strategies so people can take advantage of tax-loss harvesting and reduce their overall tax liabilities.”

Taking A Cue From History

Bayer says he’s a big fan of simplicity in investing. He likes to stick with four to seven funds built around the long-term needs of each client. “The portfolios are built around broad diversification, but they don’t include commodities,” he added. “That asset class tends to add too much volatility. And over time, it doesn’t necessarily add any additional return.”

In a typical portfolio with 60% equities and 40% bonds, Bayer likes to keep around 45% of total stock assets in funds focused on the U.S. and Canada.

With a total stock market approach, he’ll use the Vanguard Total Stock Market ETF (NYSE: VTI) or the Vanguard Total World Stock ETF (NYSE: VT). In cases where VTI is implemented, at least 60% will go into that fund. Bayer also uses as core holdings the DFA U.S. Core Equity 1 (DFEOX) and the DFA U.S. Vector Equity Fund (DFVEX).

But with clients who don’t mind being a bit more aggressive, Bayer prefers to slice and dice allocations. He’ll put an equal percentage of U.S. stock allocations into the four corners of the market: large-cap value, large-cap blend as well as small-cap value and small-cap blend.

In a slice-and-dice portfolio, Bayer uses the iShares Russell 1000 Value Index (NYSE: IWD) and the Vanguard Value ETF (NYSE: VTV). He balances those with the iShares Russell 1000 (NYSE: IWB) or the Vanguard Total Stock Market ETF (NYSE: VTI).

“If you have a long time horizon and can handle the volatility, slicing and dicing the market can really provide some extra benefits,” said Bayer. “But a slice-and-dice strategy isn’t necessarily the easiest type of portfolio to hold. You need to remain very disciplined to make it work well over time.”

Nod To Small-Cap Value

Even with a more total-markets approach, the firm still likes to tilt allocations toward small-caps and value. On the small-cap side, it uses the iShares Russell 2000 Value Index (NYSE Arca: IWN) and the Vanguard Small Cap Value ETF (NYSE: VBR).

Whether slicing and dicing or total markets in design, Bayer says his portfolios avoid small-cap growth. “It just adds a lot of unneeded volatility and lower returns over time,” he said. “I’m a value investor. So even when a client is better-suited to a more total markets approach, I still like to tilt towards value.”

In those cases, he will add blended ETFs such as the iShares Russell 2000 Index (NYSE Arca: IWM) and the Vanguard Small Cap ETF (NYSE: VB).

“Usually, I’ll start by talking to clients about taking a total stock market fund and then adding IWN or VBR to tilt the portfolio a bit,” said Bayer. “Taking a total market approach appeals to a lot of people in terms of simplicity and slightly lower costs.”

A Global View Of Markets

In a global portfolio, Bayer leans toward about 55% in non-U.S. stocks. “I’m not trying to predict whether foreign markets are doing better than the U.S.,” he said. “But a 55% international tilt roughly follows the global market capitalization percentages of VT, which is a good barometer of the total world market.”

For international exposure, he’ll buy the iShares MSCI EAFE Index (NYSE: EFA) or the Vanguard Europe Pacific ETF (NYSE: VEA). Bayer also uses the Vanguard FTSE All-World ex-US ETF (NYSE: VEU) for some investors. In a standard portfolio, he’ll put about 10-15% into emerging markets of the stock portion of his global portfolios.

For international, Bayer also talks to clients about the DFA International Core Equity Fund (DFIEX) and the DFA Emerging Marktes Core Fund (DFVQX).

“In the U.S., DFA separates developed and emerging markets,” he added. “So if we use one of those funds, we’ll also include a dedicated emerging markets fund. In those cases, we like the DFA International Vector Equity Fund (DFCEX).”

His bent toward sticking with broad-based asset classes and a disciplined strategic allocation approach to investing has its roots in the tech boom. Bayer was managing accounts for a large technology distributor and watched investors rush into hot sectors and get crushed from 2000-2002.

“I’ve always been an index investor. But back then, there weren’t as many choices with ETFs, especially to gain international exposure. But I was an early adopter,” said Bayer, who began investing for himself as well as family and friends as a teenager.

He decided to work with individual investors in 2002 and joined a small local brokerage. “They were selling traditional high-fee mutual funds,” said Bayer. “My strong preference was to use ETFs and DFA funds, which are lower-costing and provide superior long-term risk-adjusted performance,” he said.

-- This report was submitted by IndexUniverse.com's Murray Coleman.

If you think international markets are on the verge of a new leg up in the ongoing broad global rally, a few more tools via exchange-traded funds are now available to provide more leverage.

ProShares launched on Wednesday four ETFs taking 200% positions in four popular foreign indexes. Two are broad in geographic reach and each adds to existing ProShares ETFs that take inverse positions with the same benchmarks.

The new ProShares are the:

• ProShares Ultra MSCI EAFE (NYSE Arca: EFO)

• ProShares Ultra MSCI Emerging Markets (NYSE Arca: EET)

• ProShares Ultra FTSE/Xinhua China 25 (NYSE Arca: XPP)

• ProShares Ultra MSCI Japan (NYSE Arca: EZJ)

These ETFs each seek to capture 2 times the daily performance of their underlying benchmarks. That's something to consider since rival Direxion recently moved to introduce a series of leveraged ETFs that track monthly index performances. (See related article here.)

In theory, being able to track a longer return period should make the new Direxion ETFs better-suited for longer investing periods. That assumes, of course, investors hold the proposed ETFs at the beginning—rather than later—in any given month.

Two of the proposed Direxion leveraged ETFs tracking monthly performance would follow the same indexes as the new EFO and EET.

But leverage on a monthly performance basis has yet to come out. In the meantime, ProShares clearly has first-mover status in the international inverse ETF marketplace. Rydex still doesn't have any ETFs that leverage foreign markets. Direxion has two such funds, the Daily Developed Markets Bull 3x Shares ETF (NYSE: DZK) and the Daily Emerging Markets Bull 3x Shares ETF (NYSE: EDC). As their names imply, each ETF aims at 300% of the daily returns of their respective MSCI benchmarks.

The other ways to use leverage now available overseas is all through ProShares ETFs at the moment. But stay tuned ...

3 Solid Samples

ProFunds UltraBear Inv (URPIX) seeks daily investment results that match twice the inverse of the performance of the S&P 500 Index. It provides leveraged exposure to the S&P 500 Index.

URPIX primarily focuses on futures contracts, options on futures contracts, options contracts, swaps, forward contracts and other financial instruments rather than investing in securities like common stock of companies.

Unit holders have to make a minimum initial investment of $15,000 to enter this nondiversified fund. The Zacks#1 Rank ("Strong buy") fund distributes dividends and capital gains annually. It had outdone 1055.96% of its peers in terms of annual return in 2008.

UltraShort International ProFund (UXPIX) seeks daily investment results, before fees and expenses, that are twice the inverse of the daily performance of the MSCI EAFE index. It may use leveraged investment techniques to attain its objective.

The fund invests assets which are not invested in equity securities or financial instruments in debt instruments or money market instruments. It is nondiversified and has an expense ratio of 1.62%.

Erik Benke has been the lead manager at UXPIX since its inception in April 2006. Prior to joining the company, Benke was a trader at AIM Investments and an associate at Goldman Sachs Hill Group. The Zacks#1 Rank ("Strong buy") fund has outstripped the S&P 500 index by 884.15% in terms of annual returns in 2008.

ProFunds UltraShort Small-Cap Svc (UCPSX) seeks daily investment results that correspond to twice the inverse of the daily performance of the Russell 2000 index. The fund normally invests at least 80% of its assets in financial instruments with economic characteristics that inverse that of the index.

Elisa Petit has been the lead manager at the fund since its inception in January 2004. Before joining ProFund Advisors, she managed equity funds for Banque Populaire Group in Paris, France.

The fund is nondiversified and distributes dividends annually. Its annual returns beat 596.81% of UCPSX peers in 2008.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

Jim Herrell considers himself a nontraditional index investor.

The chief investment officer at Partnervest Financial Group says his contrarian investing strategies take a more proactive approach to exchange-traded funds.

"We view volatility as an asset class unto itself that's negatively correlated with equity indexes," said Herrell.

The Santa Barbara, Calif.-based Partnervest manages portfolios for advisors across the country. It's part of a growing number of asset managers acting as outsourcers to independent planning firms.

Demand for such specialists is growing rapidly, according to industry statistics, as other aspects of financial planning—such as estate, health care and tax issues—are becoming more complex.

Partnervest was founded nearly seven years ago by ex-executives of a large asset manager based in Scottsdale, Ariz., that focused on serving high net worth clients and institutions in the health care industry. Herrell is a former longtime hedge fund manager.

Efficiency In An Inefficient World

"We believe markets are efficient, but traditional asset-class investing is inefficient," he said. "We're investing with the goal of achieving high absolute returns independent of the market's direction."

Before joining Partnervest last July, Herrell was a manager at Santa Barbara Quantitative Strategies for about five years. He was also a partner at Strome Investment Management, a global macro-hedge fund.

Herrell, age 42, started using ETFs with his hedging strategies in 2003. "Not only are they more flexible and transparent than mutual funds," he said, "but many ETFs have listed options."

That's important since some of the most sophisticated hedging approaches utilized by Partnervest rely heavily on options.

"Structured targeted-return strategies that used to be the purview of hedge funds and big institutions have been democratized by the rise of ETFs," said Herrell. "Now, almost any investor can access strategies similar to those used by Harvard and Yale and other large institutions in an all-ETF format."

An approach that simply invests in long positions with ETFs is just too risky in his view. "One bad year's worth of volatility can destroy several years' worth of accumulated returns," said Herrell. "No matter how you slice and dice it, traditional asset class investing provides way too much risk for the amount of return it can provide."

Partnervest's managers say they don't try to predict market movements. "The only predictive element in our strategy is that volatility is a constant," said Herrell.  "And our portfolios are built to take advantage of that uncertainty."

The firm employs a mix of strategies using ETFs. The simplest tries to maximize alpha. For example, the firm uses the SPDR S&P 500 (NYSE: SPY). Herrell says the ETF is added into the mix with the expectation that its underlying index will show long-term volatility of at least 20% a year.

In the firm's alpha strategy, that range is split in half to target 10% price movements in any given six-month period. "Instead of buying SPY, we structure an options call spread on the ETF at current prices," said Herrell.

The process involves taking advantage of gains made from initial strike prices on those option calls. (A strike price is simply the point at which an investor is going to start making profits. If SPY is selling for $85 per share, for example, and someone buys a call option on the ETF at that level, then an investor makes money on any price gains.)

"It's like leasing an ETF for a certain period," said Herrell.

While it still provides upside participation, using call spreads reduces downside risk, he says, "because you're risking fewer dollars since the cost of the options is much less than buying the ETF itself."

Herrell adds that even in a worst-case scenario, "the most you can lose is the cost of the spread" using such a strategy.

The firm also sells short-dated options. In terms of buying activity, Herrell sticks to purchasing only longer-dated options.

Self-Funding Approach 

"Even if the market doesn't go anywhere, the shorter-term options expire, and you'll make at least a little money," said Herrell. "The net result is that as time passes, this sort of time-decay pays for the upside participation. So it's a self-funding approach which limits your downside but participates in a market advance."

The other aspect of his portfolio strategy actually involves purchasing shares of ETFs outright. Currently, besides owning SPY, some of Partnervest's portfolios include: iShares Russell 2000 Index (NYSE Arca: IWM); iShares MSCI EAFE Index (NYSE: EFA); iShares MSCI Emerging Markets Index (NYSE: EEM) and iShares Dow Jones U.S. Real Estate (NYSE: IYR).

Owning actual shares of the ETFs is part of his Volatility Enhanced Global Appreciation strategy, or VEGA. In such a portfolio, Herrell will also sell call options on a portion of those ETFs to lock in returns.

"We're swapping a potential return for a fixed return," he said.

Partnervest has developed algorithms and built its own quantitative modeling system for constructing portfolios along those lines.

"It tells us how much of an ETF to buy and when to buy and sell options and at what prices," said Herrell. "Rather than guess, we have the model that dynamically adjusts to changing market conditions based on historical volatility patterns and returns."

-- This article was submitted by IU.com's Murray Coleman.

The annual rebalancing of the Russell/Nomura Japanese stock indexes just concluded, resulting in more than 30% turnover rates for each series in the benchmarking family.

The Russell/Nomura Total Value Index had 212 deletions and 176 additions, while the Russell/Nomura Total Growth Index had 270 deletions and 136 additions.

There are Japanese stock exchange-traded funds from Barclays Global Investors' iShares family, Northern Trust's NETS and from WisdomTree Investments.

JPP and JSC are relatively small ETFs in terms of assets. JSC had close to $73 million in assets through last month while JPP had only $13.5 million.

Among all single-country international ETFs this year, those focused on Japan have held up relatively well in terms of performance. JPP was down 32.15% heading into Monday, while JSC had dropped 23.99% so far in 2008, according to Morningstar data.

That may not seem like impressive performance on the surface, but consider that the broad-based iShares MSCI EAFE Index (NYSE: EFA) for developed international markets has slid more than 45% this year.

The Russell/Nomura Prime Index, which is JPP's index, measures the performance of Japan's top 1,000 float-adjusted stocks. This year, 26 companies came into the Prime Index for the first time and its total market capitalization decreased from 201 trillion yen to 200 trillion yen (as of Oct. 15).

The turnover ratio of the index was 1.6%, which is relatively low compared to previous years, the companies said in a statement.

The number of stocks in the Russell/Nomura Small Cap Index, JSC's underlying index, dropped by 76 companies to 1,100. The small-cap index represents the top 85% and bottom 15% of the Russell/Nomura Japan Equity Index, on a market capitalization basis.

The decrease in JSC's index reflected the larger decline in the capitalization of small-cap companies relative to the overall market decrease.

RevenueShares has launched the RevenueShares ADR Fund ETF (NYSE Arca: RTR). It's the second exchange-traded fund introduced by the revenues-focused, index-based ETF family in the past week and may bring more competition to the international developed markets (ex-U.S.) category.

The RevenueShares Financials Sector Fund (NYSE Arca: RWW) launched last Wednesday (see story here).

RTR will track the RevenueShares ADR Index, another custom index designed by the ETF company to take a revenues-based slant on a major Standard & Poor's index. The rules-driven methodology re-weights the constituent securities of the S&P ADR Index according to the revenue earned by the companies in that index, subject to certain tax diversification requirements. 

The resulting RevenueShares ADR Index contains the same securities as the S&P ADR Index, but in different proportions.

RTR is unique in using the S&P ADR Index as its benchmark, the first ETF to do so. While there are region-specific ETFs based on ADR indexes, there is no ETF tracking the S&P ADR index. In fact, most of the competition for RTR will be from MSCI EAFE Index-pegged, and other developed markets index ETFs, that exclude the U.S.

This group includes the $26 billion iShares MSCI EAFE Index Fund (NYSE Arca: EFA); the PowerShares FTSE RAFI Developed Markets, ex-U.S.Portfolio (NYSE Arca: PXF); the WisdomTree DEFA Fund (NYSE Arca: DWM); and the Vanguard FTSE All-World, ex-US ETF (NYSE Arca: VEU).

RTR differentiates itself from MSCI EAFE plays like EFA by extending beyond the EAFE zone of Europe, Australasia and the Far East. RTR also adds ADRs from Canada, Mexico and South America.

RTR's most direct competition are the ETFs that take a non-market capitalization approach to the EAFE universe. PowerShares teamed with Research Affiliates to offer the PowerShares FTSE RAFI index-based ETFs, which use a four-factor, patented model.

WisdomTree is the only other ETF company in the U.S. that offers alternatives to the standard market capitalization-based equities methodologies, using both dividend and earnings-based models. DWM fits within WisdomTree's methodology for most international ETFs, which dictates that dividends are the most important measure for international stocks. WisdomTree's lineup of earnings-based ETFs primarily cover the U.S. stock market. Its only international earnings-based fund is for the Indian stock market.

On fees, RTR comes in closer to PXF (though still cheaper), more than DWM, and twice as much as the broad market capitalization-based, developed market ETFs. RTR has a management fee of 60 basis points, while PXF comes in at 75 basis points and DWM at 48 basis points. EFA charges 34 basis points and VEU 25 basis points. PowerShares recently slashed fees on FTSE RAFI ETFs to 39 basis points, but only for the domestic portfolios.

The prospectus for the new fund is here.

Many factors impact the size of the spread on ETFs, including:

• The assets held by the ETF—the more the better
• The volume of trading in the ETF itself—the more the better
• The liquidity of the stocks or bonds the ETF holds—the more liquid the better
• Market conditions-the less volatility the better

There's been a lot of talk recently about ETF spreads rising during the current volatile markets, and that looks very much to be true.

The table below looks at the average bid/ask spread for every ETF and ETN on the market, measured on a tick-by-tick basis throughout the trading day. It looks at two distinct periods—October 2007 and October 2008 (through yesterday). As it shows, the average spread for ETFs has risen sharply over the past year.

For reference, I consider any ETF with an average spread of a nickel ($0.05/share) or less to be trading well, and anything with an average spread of less than a dime ($0.10/share) to be acceptable. Once you get beyond that, spreads become a very serious issue.

In October 2007, 50% of all ETFs had an average spread of $0.05/share or less; this October, that number is down to just 16%. Similarly, a whopping 82% of all ETFs had "acceptable" spreads of $0.10/share or less in October of 2007; right now, that number is just 33%.

Another way to look at this is to examine the "spread percentage." This is probably a more accurate measure of trading costs than absolute dollar spread. The spread percentage divides the dollar spread into the share price; if an ETF costs $100/share and has a spread of $0.10/share, its spread percentage is 0.10%; if another ETF costs just $10/share and has the same per-share spread of $0.10/share, its spread percentage is 1.0%.

The table below looks at the percentage of ETFs trading different spread deciles over the past year.

Back in October 2007, 60% of all ETFs had either 0% or 0.10% spreads; in October 2008, that number is just 16%. More importantly, today, more than 62% of all ETFs had spreads wider than 0.50%, at which point, trading is prohibitively expensive.

You have to take these numbers with a grain of salt, as they can be impacted by illiquidity. If there is no market in a particular ETF, the bid and or the ask can become stale, and spreads can widen artificially. However, the trends are so large that the point is unavoidable: spreads are widening significantly in many ETFs, and that could cost investors money.

Of course, there are still plenty of ETFs that are trading beautifully. Most of the truly large, liquid ETFs continue to trade at extremely tight spreads. By my count, 31 ETFs had an average bid/ask spread in the month of October of just one penny ($0.01)—the lowest possible result. This included giant funds like the S&P 500 SPDR (AMEX: SPY) and the iShares MSCI EAFE Index Fund (NYSEArca: EFA). (A full list is posted at the end of this blog.)

But many more ETFs had spreads of $0.25/share or more.

What does all this mean for investors? It means you have to choose carefully in this market. If you are looking at ETFs with relatively low levels of assets or relatively light trading volume, check to see what the average trading spread looks like and use limit orders when entering your trades. The Arcavision data is not available to retail investors, but IndexUniverse.com has average monthly spreads data available for all ETFs for free at www.indexuniverse.com/data. If you're buying an ETF with a wide spread, factor that cost into your decision-making process.

September was a disaster for the stock market in general, but not necessarily ETFs.

Exchange-traded funds continued to grow in prominence as part of the overall U.S. equities market in September, reaching 35% of all trading, up from the previous record-level of 31%, just reached in August, according to National Stock Exchange data. The biggest part of that trading story has been State Street Global Advisors' SPDRs family of ETFs, which for the month of September represented approximately 50% of all ETF trading volume, with close to $1.4 trillion of the nearly $2.8 trillion in ETF trading volume. Year-to-date, the SPDRs also represent approximately 50% of ETF trading volume ($8.8 trillion), with Barclays Global Investors' iShares family a distant-second at $3.75 trillion.

But in a month of massive market turmoil, the news was not all good for ETFs. The iShares lost ground versus the SPDRs in terms of overall industry market share, and recent industry darling ProShares, which has received mounds of press for its rapid rise to above $20 billion in assets, saw major outflows in September, outflows at a level far surpassing any other ETF provider.

SPDR portfolios, such as its S&P 500 ETF (AMEX: SPY), saw much of the short-term market trading action, and its gold portfolio (NYSE: GLD), has been amassing considerable assets as the equities markets freefall. However, SSgA has not only led the race in terms of trading volumes, but has also gained considerable ground on Barclays Global Investors in terms of overall assets year-to-date. The SSgA ETF family had close to $169.6 billion in assets at the end of September, up from $144 billion in August, whereas BGI fell from $295 billion in August to $280 billion.

On a year-over-year basis, there has been an approximate $30 billion asset flip-flop between the two top ETF providers. In September 2007, BGI had $312 billion and SSGA $133 billion. And in terms of year-to-date cash flow, SSGA has net cash flow of $38.5 billion, while BGI stands at $22.7 billion. In terms of the worst asset story in September, ProShares was far and away the ETF industry loser in this respect, down $2.4 billion in cash flow. No ETF provider even came close to that level of net outflows for the month. The second-largest outflows were experienced by WisdomTree, which had net outflows of $119 million.

SPDRs has been buoyed by trading on the SPY, which in September had close to $20 billion in net cash flow. That is twice its year-to-date net cash flows of near $10 billion. Investors piling into gold also helped the SPDRs: GLD had net inflows of close to $3 billion in September.

Barclays suffered mostly in its broad international ETF portfolio. In fact, among the top ten largest ETF portfolios, only the iShares MSCI EAFE (NYSE: EFA) had net outflows in September, dropping $285 million. For the year-to-date period, the EFA has hemorrhaged more than $4 billion in assets. What's more, year-to-date among the top-ten largest ETFs, EFA is the only fund with net outflows of more than $1 billion, and the second-worst asset story is a distant-second. Unfortunately for iShares, it's also one of its own: the iShares Russell 1000 Growth Index Fund (NYSEArca: IWF) has had year-to-date outflows of $773 million.

Overall, only three of the top-ten ETFs have had net outflows year-to-date, and all three are iShares, the third being the iShares MSCI Emerging Markets (NYSEArca: EEM), which lost $129 million for the year. While BGI still has six of the top 10 industry ETFs in terms of assets, only two of those ETFs have larger asset bases than they did one year ago-the iShares Lehman Aggregate Bond Fund (NYSEArca: AGG) and the iShares Russell 2000 Index Fund (NYSEArca: IWM). And its largest ETFs are off considerably from a year ago: EFA is down from $48 billion in September 2007 to $32 billion as of the end of September. A silver lining for EEM is that, while it is still down year-to-date, it was actually fourth in net inflows in September among the largest ETFs, with a little more than $3 billion gained.

Notable, but not surprising among the September data is the poor performance of exchange-traded notes, the sister-product to ETFs, which have been hard hit by their unsecured debt structure amidst the worsening credit crisis. While there has been debate as to whether the unsecured-debt nature of these investments would cause a direct hit on their marketing, the answer from the September data seems to be a ‘yes.' The ETN industry had net outflows of $443 million in September, with Barclays' iPath family, in particular, accounting for almost all of that unwanted movement, down $474 million in net inflows for the month. Only three among the 12 ETN providers had net inflows in September, and at levels that would were nothing to get overly excited about: PowerShares' ETNs (co-branded with Deutsche Bank) had $68 million in ETN inflows; UBS' family has $1 million; and HSBC's ETNs saw $6 million in inflows. All of the other providers were either flat or negative, and with nine of the 12 ETN providers having $100 million or less in total assets, and marketing efforts hamstrung during the credit crisis, the situation does not look promising in the short-term for these investments.

Among the major exchange-traded product categories, the only dollar loser in September was currency, which had net outflows of $239 million. It was a minor recovery for currency ETFs and ETNs, which in August, had larger outflows of $513 million. The two worst category performers from August found better fortunes in September. Commodity portfolios, which had outflows of $542 million in August, had net cash flow of $3.6 billion in September, but that was primarily buoyed by investors migrating to GLD. The global/international category, which had close to $2 billion in negative net cash flow in August, had positive cash flow of $3.88 billion in September, the second-most among categories, but still far behind domestic equity net cash flow of $47 billion for the month.

It was a brutally down day on Wall Street by just about any measure on Monday. And exchange-traded funds were not spared any of the punishment.

With the Dow Jones Industrial Average suffering its biggest single-day drop ever (777 points, or a loss of 6.98%), all the broad market equity ETFs received a complementary backlash, and the beating was no longer focused on financial ETFs.

The SPDR Trust (AMEX: SPY) hit a 52-week low mark of 110.97, before closing at 111.38, a 9.47% drop for the day. The S&P 500 Index was down 8.79% for the day, and the Nasdaq Composite was down 9.14%. The Dow's massive loss was not among its 10-biggest drops ever on a percentage basis, but avoiding placement in that infamous group provided little reason to celebrate.

The Diamonds Trust (AMEX: DIA) closed at a 52-week low of 104.75, down 6.40% for the day. ETFs pegged to Russell indexes also showed serious bruising.

Among the 10-largest ETFs as ranked by assets, the iShares Russell 2000 Index (NYSE Arca: IWM) was down 5.58%, and finished just short of its 52-week low of 64.10. The iShares Russell 1000 Growth Index (NYSE Arca: IWF) was down 3.68% for the day.

Outside of the equities market, but among the top 10 ETFs by assets, the iShares Lehman Aggregate Bond Index (NYSE Arca: AGG) was down 0.45%; while SPDR Gold Shares (NYSE Arca: GLD) finished the day up 2.93%, and really gained in the late afternoon after news of the bailout plan's defeat in Congress was announced. Among sector ETF giants, PowerShares QQQ (NASDAQ: QQQQ) was down 3.26%, also hitting a 52-week low water mark of 37.82.

The overseas markets fared no better than the U.S. equities fiasco. Brazil had to shut down its stock exchange, the Bovespa, after it dropped near 10%, its largest loss in a decade. The MSCI World Index dropped 6.8%, its largest drop in its 38-year history. And international ETFs shared in the bleeding.

The iShares MSCI EAFE (NYSE Arca: EFA) was down 6.67%, hitting a 52-week low of 53.08. The iShares MSCI Emerging Markets (NYSE Arca: EEM) dropped more than 4% and came close to its 52-week low of 31.21, ending the day at 31.61. At least it beat something. The Vanguard FTSE All World (NYSE Arca: VEU) was down 4.63%, falling to a 52-week low of 40.50.

The good news? Well, investors in the ELEMENTS Australian Dollar exchange-trade note saw a day during which their fund was up 9.5%, or an intra-day change of 88.95%, finishing the day just short of a 52-week high. And inverse international ETFs had a good day as well.

ProShares Ultrashort FTSE/Xinhua China ended that day up 26.59%, and the same hefty intra-day return profile was achieved by ProShares inverse MSCI EAFE and emerging markets ETFs, not surprisingly. When Asian markets open tomorrow morning, one does not need to have a fanciful imagination to hazard a guess as to which direction ETFs with significant concentrations in Asia will trend.