A couple of weeks ago an article on TheStreet.com about top-performing ETFs noted, “In July, the best-performing exchange-traded funds bet either against commodities, or on biotechnology stocks.” The piece went on to note the just over 20% one-month returns of two ETFs we own in our Aggressive Growth and Daredevil portfolios: new holding DB Commodity Double Short ETN (DEE) and SPDR S&P Biotech (XBI), which has been in the portfolio for almost two years.

While we’re obviously pleased to own some big gainers especially in this hot-then-not market, we always get a little worried when funds in our portfolios start to attract attention – and money.

Our idea of asset allocation is to allocate into out-of-favor assets and wait until they are in favor. This applies to stocks, bonds, and cash in general, and specific sectors or fund categories.

The SPDR Biotech fund now has $586 million in assets. This may not be much compared to popular emerging market and other ETFs that have billions under management, but it is up from just $100 million a little over a year ago. 

When do we get out? Somewhere between now and $1 billion, though it depends on other opportunities and money flows.

While the biotech ETF has given some of the gains back in August, the commodity short fund is having another good month with solid double digit gains. The air is coming out of the commodity bubble a little faster than even we expected. It almost seems these days like we need a hurricane to slow the decline in oil prices. Expect sub $3 gas this winter. 

The trouble here – besides the high risk, fees, and difficulty timing investments in a leveraged short ETF that swings wildly day after day – is these short funds are becoming popular themselves. And we don’t like popular bets. We may have to sell after another 20% drop in oil if the herd moves in, even though we expected this to be about a one-year holding.

We’re looking for another big month of outflows from stock funds in general to increase our stock allocation across the board again. In July fund investors took $26 billion out of stock funds, after removing almost $5 billion out in June – nice levels and in general the sort of negativity we want to see when we are buying (as we were at the beginning of July). $20 billion or so more pulled out would be grounds for another step up in stock allocations. So far estimates for August are about just $4 - $5 billion out so we’ll likely need to see another scare – perhaps a 500 point one day Dow drop on some big bank or other company failure. 

For the remainder of the year we expect to see more of the same – big up and down moves in the market, more trouble in financials, U.S. stocks outpacing foreign stocks especially emerging markets, a rising U.S. dollar, and falling commodities. 

2008 is shaping up to be one of those years that everything that investors flocked to in recent years falls apart – sort of like 2000.