I’ve written several times about market cycles and about how if we know where the markets are within a specific cycle, it increases the possibility of knowing what its next move will be. Obviously everything around us has cycles. Some are natural, like a heartbeat or lunar phases. Others are contrived, like the hum of an engine or the recurrence of a scheduled event. Careful periodic examination of these cycles can be revealing. For example, when a heartbeat changes, that is a reaction to something that is going on with the body.

The past two weeks many of us have intently watched the events of the Winter Olympics in Turin, Italy. Four years ago the Games were unfolding in Salt Lake City. Both events have greater meaning for people here in Utah because of our involvement with the Winter Games. Because it was such a significant event, I can remember clearly standing in lines four years ago waiting to clear security to attend Olympic events. I remember the crowds, the smells, the banners and signs. My memory of what was occurring in the financial markets at that time is murkier, so this week I took a few moments to review where the markets were four years ago and what has happened since.

Just for your information, since Feb. 10, 2002 until now, the Nasdaq has advanced 25.5%, for an annualized return of about 5.8%. Over the same period, the Dow is up 14.3%, for an annualized gain of 3.4%. The markets actually showed some strength during the 2002 Winter Olympics, but collapsed after the games ended. The remainder of 2002 turned out to be a horrible year for most investors. Fortunately, all the losses of 2002 were erased in 2003. Unfortunately, since the end of 2003, Neither the Dow nor the Nasdaq has made much progress. Since then the Nasdaq has gained 14% and the Dow is up just 6.5%.

Below is a chart that illustrates the situation. Notice that since the big moves of 2002 and 2003, these two averages have traded in a fairly tight range that has narrowed further in the past few months. I added the yellow arrow just to make it easier to see the level where the averages where in February 2002 compared to today.

The past couple of years have been quite discouraging for traditional buy-and-hold investors and there is no indication that the situation is going to improve in the near future. Unless there is a dramatic change, it appears that major market averages will continue to move mostly sideways in narrow trading channels.

Fortunately, exchange-traded funds (ETFs) offer investors an opportunity for hope. During the 2002 Salt Lake Winter Olympics, ETFs were relatively unknown. Only a few dozen existed and few investors had ever heard of them. That’s too bad because some of those early ETFs have earned remarkable returns over the past four years. For example, Merrill Lynch Oil Sv HOLDRS (OIH) has gained 153% during the same period as illustrated on the above chart. IShares Cohen & Steers Realty Major Index Fund (ICF) is up 142% during that same period.

But those aren’t even the top-performing ETFs during that time! The gold medal winner would be iShares MSCI - Austria Index Fund (EWO), up a scorching 309% in four years. The sliver medalist would be iShares MSCI - Brazil Index Fund (EWZ), up 291%. And the bronze medal goes to iShares S&P Latin America 40 Index Fund (ILF), with a return of 226%. I’ve included these on another chart so you can see the comparison.

I hope these funds and sectors seem familiar to those who have been reading this report for the past year. These have been the same sectors and funds that have been among the leaders throughout 2005 as well.

So while major market averages have generally failed to provide investors with great returns over the past four years, many ETFs have offered solid opportunities for profit. In fact, there are 52 ETFs that have returns of more than 50% during that period. There were 79 ETFs that outperformed the Nasdaq over that time.

At some point, these leading sectors will fall out of favor as the business cycles shifts to reward other sectors of the economy. When that occurs, other funds will will emerge as the place for investors to keep their money. When that happens, we hope to provide you with accurate, timely information.