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Many ETFs are Stupid and Shouldn't Exist



July 26, 2010 – Comments (5) | RELATED TICKERS: USO , UNG

Every time i hear an interview with an "investment advisor" on the radio and they say that they only invest in ETFs I cringe.  I just don't get them.  Sure some, like the ones that invest in a basket of actual stocks, are fine.  But many of them are a complete joke.  The worst of the ETFs are the ones that are supposed to track a commodity or a basket of commodities.  

This week's Bloomberg Businessweek has a great article on the inherent flaws in Commodity-related ETFs and how the market's normal contango eats away at investor returns.  It is a must read for anyone who owns a commodity tracking ETF, such as UNG or USO.  

If I personally have an exceptionally strong feeling about where the price of a commodity is headed, I will usually attempt to play the theory by purchasing stock in a company that directly benefits from the move that I am forecasting, not by using one of the dumb commodity ETFs.  

I am currently short VXX, the ETF that supposedly tracks market volatility, in CAPS.  I am considering adding shorts of another commodity-based ETF or two in the future.  Is anyone out there in CAPS land short commodity ETFs?  If so, which ones and how is it working out thus far?


Amber Waves of Pain


5 Comments – Post Your Own

#1) On July 26, 2010 at 6:04 AM, TMFDeej (97.65) wrote:

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#2) On July 26, 2010 at 6:13 AM, TMFDeej (97.65) wrote:

Here's a great quote from the article:

Just as they did with subprime mortgage-backed securities, Wall Street banks are transferring wealth from their clients to their trading desks. "You walk into a casino, you expect to lose money," says Greg Forero, former director of commodities trading at UBS (UBS). "It's the same with these products. You're playing a game with a very high rake, a very high house advantage, and you're not the house." 


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#3) On July 26, 2010 at 6:39 AM, ragedmaximus (< 20) wrote:

ive done nothing but lose money on faz ery and dxd. one time i hit on faz a 12% gain after 4 previous days of losses i made 3%. it's hard to buy the dow could be down 200 and ery faz would be down cause energy up and financials up even on a down day its worse odds than betting on black or red

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#4) On July 26, 2010 at 9:04 AM, Melaschasm (69.77) wrote:

I sometimes invest in ETF's, but I invest in ones that are basically a mutual fund, such as an S&P 500 ETF.  So far I have not encountered anything as bad as the commodity ETFs, but then I look at their return over the past several years, before investing.

Based upon my research, I do not intend to ever invest in a leveraged ETF, or a commodity ETF (with a possible exception of an ETF storing a commodity like gold).

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#5) On July 26, 2010 at 11:16 AM, Griffin416 (99.97) wrote:

I am consistantly short UNG, (GAZ is good too) My pitch for shorting it was quoted in a MF article, hehe. Nat gas was flat for the year, UNG was down 40%, laughing all the way to the bank. It is the best one. With all the shales in the US, the supply is exploding, hence most likely lower price too. UNG is the largest failure of an ETF.

As my caps does, I also short in RL all the time the 3x bear ETF all the time...but as 5% of my portfolio or less, so I don't get annihilated during market swing. I enjoy the small caps, SRTY and TZA.

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