Investments to Avoid

Every year, the Morningstar mutual fund tracking organization releases a list of the worst new ETF investments—and generally, these tend to be trendy new offerings that are designed to catch the eye of investors who are responding to yesterday’s headlines rather than their long-term economic future.

This year’s top nomination is something called the VelocityShares Leveraged Crude Oil ETN, closely followed by the VelocityShares 3x Inverse Crude Oil Fund.

What do you get when you invest in these shares? Every day, the VelocityShares products give you three times the daily movements of the price of oil on the global markets. The first fund gives you three times the amount that the price changes in the same direction, while the second gives you three times the movement in the opposite direction.

Set aside the fact that there is no conceivable reason why you would want daily exposure to an investment as volatile as crude oil. For the moment, ignore the fact that the typical portfolio already has plenty of oil exposure, since energy companies are among the largest of the large caps, and just about every U.S. and global organization uses energy as one of its major expense items.

The bigger problem with these shares is that the more volatile an investment is, the lower its long-term performance will tend to be in dollar terms. When a stock or ETF goes down 50% and then back up 50%–and this could happen in a week with these shares—the round trip delivers you a 25% loss. Lather, rinse and repeat, and you’re looking at an underperforming asset—at three times the normal velocity.

What else did Morningstar single out? You might also consider avoiding the Whisky & Spirits ETF. Not only is this portfolio concentrated on a small component of a much larger business sector, it is even highly-concentrated within the small realm of alcoholic beverages. A single stock accounts for 23% of the portfolio, and its top 10 holdings comprise 79% of the total dollars invested. And for this absurd lack of diversification, you pay 75 basis points a year—as much as you might pay for a diversified international fund. Why not just buy your own distillery instead?

 

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