Exchange traded funds (ETFs) have been a wonderful development for investors, but the market is full of underperforming ETFs.

In the past, it was difficult for ordinary people to build diversified portfolios at a low cost. Investors generally had to deal with exorbitant brokerage fees to buy individual stocks. For investors who wanted to buy diversified products, the mutual funds of that day tended to have high management fees, which greatly reduced long-term returns.

ETFs, however, have made it possible for investors to buy dozens or hundreds of different individual stocks within one ETF wrapper in a single transaction. Additionally, ETFs usually have modest fees far lower than comparable mutual funds.

Simply put, ETFs have revolutionized the investing landscape, and the financial world is better for it.

However, not all ETFs are equally beneficial for investors. ETF providers have developed an increasing number of niche and specialized ETFs, and not all of these products have the same merits as broad-based index or sector funds.

These are three underperforming ETFs that sound much better on paper than they’ve actually been in practice. While these ETFs may eventually find ways to deliver alpha, they seem more like traps than treasures right now. Here are the three underperforming ETFs:

Underperforming ETFs: Renaissance IPO ETF (IPO)

The Renaissance IPO ETF (NYSEARCA:IPO) is a fund that buys positions in initial public offerings (IPOs) as they debut. It gradually reduces their weighting and eventually removes them from the portfolio altogether as they age out and become more mature companies.

This strategy exposes investors to a broad selection of the latest and greatest companies debuting on American stock exchanges. This sounds great.

But in practice, this has not worked nearly so well. IPO shares have risen 87% over the past 10 years. That’s not awful, but it’s far short of the 175% increase in the S&P 500 Index over the same period.

There are several concerns with buying every IPO that comes out. For one, it’s not selective. Some IPOs go on to be huge winners, but most new and established companies tend to be pretty unremarkable. Simply throwing a dart at every new company won’t necessarily lead to outperformance.

Another concern is that companies often cease to be eligible for inclusion in the IPO ETF before they take off. For example, an IPO ETF investor would have only held shares of Amazon.com (NASDAQ:AMZN) or Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) for a few years before they stopped being recent IPOs and were thus removed from the ETF. This would strip away the vast majority of the long-term returns that those transformational companies would go on to generate far after their IPO date had passed.

The final concern is that CEOs tend to be opportunistic. When they carry out their IPOs, the market is hot, and valuations are high. A strategy of indiscriminately buying all IPOs risks overpaying for newly listed equities. All this explains why the IPO ETF has dramatically underperformed the market and is likely to continue doing so going forward.

VanEck Social Sentiment ETF (BUZZ)

The VanEck Social Sentiment ETF (NYSEARCA:BUZZ) has a unique concept for an ETF. I’ll give it that.

The fund seeks to capitalize on unique positive insights gleaned from social media, news articles, blog posts, and other alternative dataset sectors. The idea is that this wisdom of the masses can lead to alpha.

BUZZ debuted in 2021, right during the first meme stock wave. At this point, everyday celebrities such as Dave Portnoy were getting into investing and helping take trading mainstream; indeed, Portnoy would go on to promote BUZZ directly.

While the idea behind this ETF was plausible, it has failed to play out. BUZZ is down 17% since its inception in 2021. Meanwhile, the overall stock market is at new all-time highs. Even the renewed round of meme stock mania hasn’t been enough to cover this discrepancy.

Looking at its top holdings, BUZZ’s biggest hitters include Microstrategy (NASDAQ:MSTR), Coinbase (NASDAQ:COIN), and Super Micro Computer (NASDAQ:SMCI).

All of these stocks have done great in the past. But the fear is that by the time they reach the top of social media and obtain positive buzz, most of the gains may have already played out. The BUZZ ETF owns generally highly valued stocks that tend to be prone to severe pullbacks when market conditions change.

There certainly is real insight to be found on social media and in online stock discussions. However, simply buying a basket of the stocks that the internet is discussing at the moment seems unlikely to produce superior returns over the long term.

Ark Innovation ETF (ARKK)

Cathie Wood’s Ark Innovation ETF (NYSEACRA:ARKK) has become one of the hottest names in the ETF space over the past few years. Her growth-focused portfolio achieved great returns during the pandemic-driven tech stock boom and attracted massive inflows.

Despite ARKK’s dramatic underperformance in recent years, the ETF still has over $6 billion in assets under management today.

Wood and her team at ARK Invest publish extensive research about innovation, disruptive technologies, the future of society, and megatrends. Many investors reasonably assumed that this compelling body of research and expertise would translate to durable long-term investment performance.

Oddly enough, ARK Invest missed out on several of the big disruptive stories of recent years. For example, in 2022, it slashed its exposure to Nvidia (NASDAQ:NVDA), thus missing out on one of the greatest disruption stories in recent memory.

Today, the ARKK ETF portfolio remains full of names like Roku (NASDAQ:ROKU), Block (NYSE:SQ), Roblox (NYSE:RBLX), and Zoom Video Communications (NASDAQ:ZM), which were big winners during the early days of the pandemic, but are nowhere as disruptive or promising in 2024.

This ETF is still trying to use a 2021 playbook for the current tech bull run. However, the technology that is in high demand now has shifted towards artificial intelligence, semiconductors, and other fast-evolving fields.

ARKK’s portfolio seemingly remains stuck in the past, so its returns have disappointed. ARKK shares are still selling more than two-thirds below their all-time highs. That’s an awfully disappointing performance, given that the Nasdaq is already at new highs and keeps on advancing.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.