From January through the end of April, investors' confidence in an economic recovery buoyed strong performances in equity exchange-traded funds (ETFs). Industrial and consumer discretionary categories, which are typically early indicators of an economic recovery, were up slightly more than 17.2%, and 16.96%, respectively, beating the Standard & Poor's 500 index, up 6.42%.

But the momentum changed on May 6, after the so-called Flash Crash sank the Dow by almost 1,000 points during intraday trading. Concerns about fundamentals in the healthcare and energy sectors made investors question the strength of an economic recovery. The BP disaster and the European sovereign debt crisis worsened their outlook. Between early May and June 10, all nine large-cap sectors tracked by Select Sector SPDR, which tracks large-cap ETFs, were in the red.

Overall, by June 30 ETF assets were $798 billion, down from $847 billion in April. Only safe haven sectors like commodities and fixed income had net new assets. The fixed-income group took in $13.7 billion in net new assets. SPDR Gold Shares had the most net new assets by far for an individual fund, with $4.35 billion in May 2010, coming close to record highs in February 2009 ($5.6 billion). "We've seen a very dramatic shift from late April," says Dan Dolan, a director of wealth management strategies at Select Sector SPDRs. "The market is struggling with this: Are we recovering or not?"

EARLY MOMENTUM

Some portions of the ETF market have withstood the recent slowdown. Year-to-date through June 4, the sectors that led the early-year rally stayed in positive territory. Consumer discretionary ETFs were up 5.8%, due to increased buying across every category. "It told us that those who have the means were purposely holding back [in 2009]," says Tom Lydon, president of Global Trends Investments, an Irvine, Calif.-based research firm that also publishes ETF Trends. Industrials rose by 2.3%, powered by strong economic indicator data. U.S. manufacturing output had surged 1% in April. Also, the inventory-to-sales ratio had fallen to a very low 1.24 in March. That tightened supply chains and inventories at most businesses, according to analysts.

STALLED OUT

After late April, however, several factors dragged the equity market down. The healthcare group was down 8.3%, following the passage of healthcare reform. Pharmaceutical companies fretted about how their products would perform with the government's bigger role in overseeing the delivery of health services, Lydon says. In the energy sector, the ruptured BP oil well in the Gulf of Mexico exposed the risks of offshore drilling. Public anxiety over BP's struggles, and the new moratorium on offshore drilling, have pulled the energy sector down 9.6%.

Overseas equities have also provided little shelter for battered investors. The iShares MSCI EAFE Index Fund [EFA], which tracks the developed international market, was down 12.2%, because of heavy exposure to European equities.

The emerging market sector suffered too. The iShares MSCI Emerging Markets Index [EEM] was down 8.1%, mainly because of fears that China's economic expansion may stall. Just about the only silver lining was that Europe's problems made a winner out of the U.S. dollar. The PowerShares DB U.S. Dollar Bullish ETF [UUP] was up 11% through June 4.