The timing of my article on hedging strategies last week seemed a bit prescient though I have to say I wasn’t expecting the bulk of the plunge to come in a single day.

The S&P 500 plunged more than 8 percent at its lowest point on Thursday, and finished the day down around 4 percent. On the other hand, SPDR Gold Trust (NYSE: GLD) and iPath S&P 500 Short-Term Futures ETN (NYSE: VXX) gained 2.9 percent and 12.1 percent, respectively. That’s an object lesson in the value of hedges.

But the outstanding performance of those two securities weren’t enough to silence critics of the ETF structure that have emerged since Thursday’s turmoil.

The media is laying most of the blame for Thursday’s troubles on the keyboard of a fat fingered trader at Citigroup (NYSE: C) who accidently placed a sell order on billions of Proctor & Gamble (NYSE: PG) shares instead of millions. There’s also evidence of problems in trading of Accenture (NYSE: ACN) and a number of other securities.

The widespread problems have led to NASDAQ and the New York Stock Exchange cancelling trades in a combined total of 454 securities, of which almost 70 percent are ETFs and ETNs.

In one of the most widely cited examples of the problems ETFs run into, shares prices of Rydex S&P Equal Weight (NYSE: RSP) went from around 40 early in the day to trading through 10 cents and touching fractions of a cent around 2:45PM. By 3:00PM, share prices were once again back up to around 40. That’s the most extreme case of the 304 ETFs and ETNs that had this happen to their shares.

The core criticism is that the share creation/redemption process failed.

The defining feature of an ETF, the share creation/redemption process is the mechanism that keeps a fund’s market price in line with its net asset value. When the market price of an ETF is less than the value of the assets that the fund holds, authorized participants will buy up a block of shares and exchange them with the fund for a basket of the underlying securities. When ETF shares are trading at a premium, authorized participants will buy the basket of securities that the ETF owns and present them to the manager for shares of the fund.

That process benefits shareholders by preventing large discounts or premiums from forming and helps keep trading spreads tight by providing liquidity while benefiting the authorized participant by generating arbitrage profits.

Critics point to the fact that that for about 20 minutes at the nadir of the market on Thursday, spreads in some ETFs widened to the point that you could have driven a freight train through them, implying that liquidity dried up.

While that was the case with some ETFs, most remained extremely liquid throughout the dip and, judging by the huge surge in volume, became an important tool for institutional traders during the uncertainty. Indicative net asset values that are published about every 15 seconds throughout the trading day also consistently reflected the ‘perceived’ value of their holdings throughout the problems, implying that the pricing of the underlying securities was operating efficiently.

The simple fact is the valuation process ETF managers use is largely automated based upon on pricing information they receive from the exchanges throughout the day. If that data is flawed, valuations will be flawed, so the worst of the problems in ETF pricing showed up in ETFs that had large positions in the stocks that had the most abnormal trading.

It’s also unrealistic to expect the ETF unit creation/redemption process to act as a corrective mechanism on a minute by minute basis. The process works by shrinking or expanding the supply of available ETF shares to meet the current demand. But the information on those trades has to be conveyed to the markets and, of course, there’s a slight lag for other market participants to catch on.

Finally, ETFs trade on exchanges. Like everything else that trades on an exchange — from stocks to bonds to options – they’re subject to market errors if and when they occur. That’s a systems problem, not an issue with the ETF structure.

Like everything else, ETFs are only as good as the information upon which they rely so there isn’t any reason to try to lay the blame on ETFs themselves. In fact, ETFs are still the best option available for both buy-and-hold investors and short-term traders.

If you’d like some ideas on how to get started, take advantage of the free 30-day trail that we’re currently offering to Global ETF Profits.

What’s New

iShares, already the largest ETF provider in the world with more than $300 billion in assets under management, became a little larger last week as it continued to flesh out its single-country offerings.

On May 7 trading began in iShares MSCI Ireland Capped Investable Market Index (NYSE: EIRL), iShares SCHO Indonesia Investable Market Index (NYSE: EIDO) and iShares MSCI USA Index (NYSE: EUSA).

As their names imply, the Irish and Indonesian funds are both designed to capture the performance of 99 percent of the investable market of those countries, excluding the smallest and most illiquid companies. Of the two, the Irish fund is the most interesting.

In the run-up to the Great Recession, Ireland had been extremely attractive to investors and corporations alike. Earning the title of Celtic Tiger, the combination of a well educated workforce and low corporate tax rate attracted a huge amount of foreign investment as companies such as Microsoft and Pfizer set up substantial offshore operations in the nation. That, in turn, attracted investors.

But as the credit crunch blew up the balance sheets of financials around the world, Ireland’s banks were hit by bad real estate loans and government budgets were ground down by plunging tax revenues. The country also took a hit as travel budgets were cut since tourism generally contributes between 4 percent and 5 percent to GDP growth. That perfect storm sent unemployment skyrocketing, drove up the government deficit and shrank Irish GDP by 7.5 percent in 2009 and will likely contribute to a 0.9 percent decline in 2010 according to estimates by the European Commission.

Next year is expected to bring marked improvement for the Irish economy though, we GDP expected to grow by about 3 percent.

A major driver of that improvement is the measures that the Irish took to address the economic crisis. Unlike other global governments which turned to huge stimulus packages to kick start their economies, the Irish took the opposite approach and used the crisis as an opportunity to address what were large and growing government deficits.

Of the European Union countries, Ireland’s budget deficit of 14.3 percent of GDP was the largest last year and helped solidify the country’s place in the PIIGS. That’s quickly becoming an unfair comparison though as Ireland has made strides towards addressing its deficit though budget cuts and reining in government spending which soared during the economic boom. The nation’s deficit is expected to fall to 11.7 percent of GDP this year and to continue declining.

Unlike Greece, Ireland is making huge strides towards improving its national fiscal position. At the same time, many companies are looking to outsource functions such as technical support and customer service and Ireland, with its highly educated English speaking workforce, is an attractive destination. Tourism is also in the nascent stages of recovery.

As improvement continues in all of these variables, I wouldn’t be surprised if Ireland surprises to the upside.