This time of year is all about looking over your portfolio and positioning your assets for success in 2014. You should be actively screening your holdings to determine what changes to make before the end of the year, including finding ETFs to sell and stocks to trim back on.
I always recommend looking over your losing positions and re-evaluate your thesis for owning them. If there is no longer a sound fundamental or technical reason to hang onto a stock, ETF or mutual fund then you should consider selling it and looking for new opportunities. This is especially true for taxable accounts where year-end tax loss selling can be of benefit to help offset capital gains and finding ETFs to sell or stocks to sell can actually help you keep more cash.
With that in mind, I was perusing the list of the 100 worst ETFs according to year-to-date returns published by ETFDB.com this week, and found some interesting statistics.
Not surprisingly the top of the list is dominated by ultra-short funds, commodity related ETFs, and volatility indexes. These have been the hardest hit sectors this year, and ETFs with leverage magnify that effect.
The biggest loser has been the Direxion Daily Gold Miners Bull 3x Shares (NUGT) which has lost 95% of its value in 2013 adjusted for splits. If that isn’t a flashing billboard for the use of stop losses, I don’t know what is.
Putting the outliers aside, there are several other ETFs that I think warrant a closer look before the end of the year.
Volatility Is Not Your Friend
The iPath S&P 500 VIX Short-Term Futures ETN (VXX) is designed to provide access to equity market volatility through CBOE Volatility Index futures. Simply put, this exchange-traded note offers investors the ability to capitalize on the CBOE VIX Index — which is a widely recognized measure of fear in the marketplace. Throughout 2013, that fear has largely been replace with greed for stocks and the VXX has fallen more than 60% year-to-date.
There have been numerous articles and in-depth analysis of this ETF that point to the inefficiencies of tracking the CBOE VIX index. Despite those negatives, VXX still has more than $1 billion in assets and investors are lured to its negative correlation has a hedge against market volatility.
My recommendation is to consider selling VXX and moving to a more traditional hedging strategy using an inverse equity ETF such as the ProShares Short S&P 500 ETF (SH) if you doubt the rally. That way you get direct correlation to an established index and know exactly how it will react when stocks fall.