At the end of July, there were nearly 2,200 exchange traded products (ETPs), including exchange traded funds (ETFs), listed in the U.S. And there both are benefits and drawbacks tosuch a large number of ETFs being readily available to investors.
Put simply, choice is usually a good thing. Consumers want choice when it comes to airlines, cellphones, where to shop and where to eat. Likewise, investors want choice regarding investments. Another benefit of the massive amount of ETFs on the market today is that issuers are increasingly competitive regarding fees. Plenty of brokerage firms are even offering ETFs to clients on a commission-free basis.
The disadvantages of too many choices among ETFs include the proliferation of overly complex products, ETFs geared toward limited audiences and ETFs that are thinly traded, potentially driving up investors’ costs in the process.
Here are seven ETFs that are not necessarily bad products, but are definitely not for everyone.
ETFs That Aren’t for Everybody:
Expense ratio: 0.95% per year, or $95 on a $10,000 investment.
The MicroSectors FANG+ Index 3X Leveraged ETN (NYSEARCA:FNGU) debuted earlier this year and is part of what is a broader, growing suite of leveraged exchange traded notes (ETNs) focusing on the FANG quartet and related stocks.
FNGU tracks the equal-weight NYSE FANG+ Index, which features 10 stocks, including Facebook Inc.(NASDAQ:FB), Amazon.com Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Google parent Alphabet Inc. (NASDAQ:GOOGL).
Leveraged ETFs, regardless of the underlying asset class, are not intended for use by a broad swath investors. That is particularly true of leveraged products with narrow focuses like FNGU.
ETFs That Aren’t for Everybody:
Expense ratio: 0.75% annually, or $75 on a $10,000 stake.
The iPath Global Carbon ETN (NYSEARCA:GRN) has been around over 10 years, but age does not mean an ETF should be consumed by large audiences. GRN tracks the Barclays Global Carbon II TR USD Index.
GRN, simply put, is a play on the the carbon credits that allow companies to release a certain amount of carbon into the environment.
“The Index is designed to measure the performance of the most liquid carbon-related credit plans. Each carbon-related credit plan included in the Index is represented by the most liquid instrument available in the marketplace. The Index expects to incorporate new carbon-related credit plans as they develop around the world,” according to Barclay’s.
GRN’s status as a not for everyone ETF is cemented by an investment concept many market participants are not familiar with and low volume — which could mean increased costs.
ETFs That Aren’t for Everybody:
Expense Ratio: 0.68%, or $68 on a $10,000 position.
The Global X Millennials Thematic ETF (NASDAQ:MILN) is one of those ETFs that is not for everyone, but is not a “bad” ETF, either. MILN is up nearly 29% over the past year, or more than double the returns of the S&P 500 over the same period.
MILN tracks the Indxx Millennials Thematic Index. That index is designed to deliver exposure to companies levered to millennial spending trends, including “social media and entertainment, food and dining, clothing and apparel, health and fitness, travel and mobility, education and employment, housing and home goods, and financial services,” according to Global X.
The issue with MILN is its fee. At the sector level, MILN looks a lot like a traditional growth fund and many growth ETFs can be had for fees of 0.20% per year or less.
ETFs That Aren’t for Everybody:
Expense ratio: 0.70% per year, or $70 on a $10,000 investment.
One of the great things about ETFs is that these products have made scores of asset classes — including commodities — more accessible to mainstream investors. That does not mean regular investors need to embrace all the not-so-mainstream commodities ETFs on the market.
Using ETFs or ETNs to access gold, oil and silver is one thing. That is an advisable strategy for many investors and traders. Getting involved with some of the more obscure corners of the commodities universe is a different ballgame.
To that point, the iPath Bloomberg Cocoa Subindex Total Return (NYSEARCA:NIB) is an effective way for more experienced traders to play cocoa’s price action, but commodities are not for every investor. Ordinary investors would be best served by focusing on the most accessible, liquid commodities and leaving more unique fare, such as cocoa, to the professionals.
ETFs That Aren’t for Everybody:
Expense Ratio: 0.50%, or $50 on a $10,000 stake.
The Obesity ETF (NASDAQ:SLIM) is one in a long line of ETFs with highly focused investment concepts. There is nothing wrong with that. Many nuanced ETFs have gained traction with investors. Data suggest SLIM’s underlying investment concept is valid.
“Obesity rates are predicted to steadily increase until 2030. Global obesity levels are expected to be highest in the United States, Mexico and England, where 47%, 39% and 35% of the population respectively are projected to be obese by 2030,” according Janus, SLIM’s issuer.
And it is impossible to argue with SLIM’s 12-month gain of more than 51%. SLIM’s drawbacks are its fee, which is well above average for what amounts to be a sector fund, its allocation of almost 19.7% to its largest holding. That opens the door for potential company-specific risk.
ETFs That Aren’t for Everybody:
Expense ratio: 0.70% per year, or $70 on a $10,000 position.
The First Trust Indxx Global Agriculture ETF(NASDAQ:FTAG) has a cheaper, more mainstream competitor, but even that product has lagged the S&P 500 for much of the current bull market in U.S. stocks, underscoring the weakness in agriculture-related equities.
FTAG checks a lot of the boxes of ETFs that are not for everyone. It has a high fee, low assets under management, slack volume and offers exposure to an asset class that has mostly been repudiated during one of the longest bull markets on record.
FTAG is down 10.52% year-to-date.
ETFs That Aren’t for Everybody:
Expense Ratio: 1.5% or $150 on a $10,000 position
The London Interbank Offered Rate (LIBOR) is based on five major currencies and is used as the first step in formulating rates on various loan products used on a global basis. There are seven different LIBOR maturities and over 30 LIBOR rates priced daily. In other words, LIBOR is fairly sophisticated concept and any ETFs using it as a pillar of the investment process are likely to complex as well.
That is the case with the VelocityShares Long LIBOR ETN (NYSEARCA:ULBR). ULBR’s prospectus highlights the sophisticated, complex nature of the product.
“For the Long LIBOR Index, assuming a targeted participation rate of 100%, this means that if the composite forward LIBOR rate were to increase by 5% from one day to the next, the Long LIBOR Index would aim to increase by 5% over that one-day period, and if the composite forward LIBOR rate were to decrease by 5% from one day to the next, the Long LIBOR Index would aim to decrease by 5% over that one-day period,” according to VelocityShares.
No, ULBR is not an ETF for everyone, but it could gain a following among professional fixed income traders and other high-end market participants.
Todd Shriber does not own any of the aforementioned securities.
