What Does Business Week Call "America's Worst Investment"?

If you've been considering making an investment in a commodity-related ETF, the cover story of this week's edition of Business Week might make you think twice.

So what is it about these funds that's led the magazine to call them "America's Worst Investment"? The authors focus in on the U.S. Oil Fund, which is designed to track the spot price of light, sweet crude. But the fund has had a difficult time doing so. As the authors note, since its April 2006 launch, the fund has lost 50 percent, while the price of crude has climbed 11 percent.

The reasons for this jaw-dropping spread are detailed in the article, which is well worth a read.

The problems highlighted there are just the most recent manifestation of a problem that's plagued the mutual fund industry for decades: fund marketers racing to meet investor demand with a host of products designed to capitalize on what's hot.

As the ETF industry took off over the past few years, fund managers raced one another to be the first to offer funds that tracked smaller and smaller niches of the investment universe. And as those funds were brought out, little time was spent considering whether or not some of the smaller corners of the investment world were ready for prime time.

Clearly, some were not. As commodity prices around the globe took off in 2006-2007, investors fell all over themselves attempting to get a piece of the action, pouring hundreds of billions of dollars into areas of the markets that had heretofore been dominated by a relative handful of highly specialized investors.

The result, as the article notes, is that "Wall Street banks are transferring wealth from their clients to their trading desks."

As my Moneywatch colleague Larry Swedroe has pointed out, a small allocation to a broad basket of commodities may help improve a portfolio's diversification. But with ETFs tracking coffee, sugar, tin, heating oil and more, it's difficult to imagine that the majority of investors are using those funds to further diversify a prudently constructed portfolio. Instead, it seems that they're being used to bet on hunches.

If you have the urge to place a bet, by all means go ahead and do so. But before doing so, make sure that your bet on the nickel market doesn't end up putting a significant dent in your retirement outlook.