5 ETFs With Nasty Surprises
With a universe of nearly 1,500 ETFs, there were bound to be a few bad apples. Steer clear of these.
At the end of March, there were 1,446 exchange-traded products listed in the US. ETFs accounted for 1,234 of that number with ETNs representing the remaining 212. In a product universe that's rapidly approaching 1,500 and that will probably surpass that number in a matter of months, it's not surprising that there are a few bad apples in the barrel.
Those that dislike ETFs are often guilty of criticizing the asset class at large or honing in on the failures of one product to indict all exchange-traded products. Neither course of action is accurate or fair, but the fact of the matter is some ETFs are full of nasty surprises.
Let's look at some of the most egregious offenders. Leveraged ETFs were excluded from this list because their flaws are well known and documented to the point that we don't need to repeat those points here. However, more obscure leveraged ETNs were included.
ALPS Alerian MLP ETF (AMLP) For as popular as MLPs have become over the past several years, there are just two ETFs devoted to these high-yielding companies and one of the two, the Yorkville High Income MLP ETF (YMLP), isn't even two months old. Regardless of age, AMLP and YMLP share the same nasty surprise in common: Neither is structured as a C-corp.
That can lead to elevated costs for investors and that comes on top of high expense ratios for both of these funds. Not having the C-corp. structure means you, the shareholder, get stuck with fund-level tax liabilities.
United States Oil Fund (USO) It can be argued that the United States Oil Fund is the original purveyor of an ETF with a nasty surprise. For those that aren't familiar with USO's less-than-illustrious reputation, the fund, minus fees and expenses, is supposed to track the price of West Texas Intermediate crude. USO does a decent job of doing that on a daily basis, but the fund's fees and expenses are killers over time and that explains why USO's performance over an extended time frame, say 12 months, 18 months, etc., significantly lags crude futures on the upside.
First Trust NASDAQ CEA Smartphone Index Fund (FONE) The First Trust NASDAQ CEA Smartphone Index Fund isn't a bad ETF and although the fund has been criticized for being too much of a niche play, that's just an opinion, not a nasty surprise. FONE's unfortunate surprises can be easily avoided by looking at the ETF's holdings.
One might assume given this ETF's name that it would be home to large weights Apple (AAPL), Google (GOOG), and Samsung (SSNLF.PK). Yes, Apple and Samsung are FONE's two largest holdings, but that trio doesn't even combine for 8% of FONE's weight.
UBS E-TRACS 1 Month S&P 500 VIX Futures ETN (VXAA) The UBS E-TRACS 1 Month S&P 500 VIX Futures ETN is part of a suite of six volatility ETNs introduced by UBS last year. Not only does VXAA (and its five siblings for that matter) feature 1.35% tracking fee, the annual expenses are 4% meaning your stuck with a controversial product that costs 5.35% per year.
VelocityShares Daily 2x VIX Short-Term ETN (TVIX) It's no surprise that the controversial TVIX makes an appearance, but we could have opted for any ETN or ETF susceptible to trading at an elevated premium to its indicative value. In other words, the iPath Dow Jones UBS Natural Gas ETN (GAZ) would be just fine in this spot.
The surprise is, and it's a bad one, that the creation/redemption process can break and when it does, TVIX, GAZ, and other high-premium-to-indicative-value ETPs become vulnerable to massive downside.
Editor's Note: This content was originally published on Benzinga.com by The ETF Professor.
Below, find some more great ETF and market content from Benzinga:
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter