The Ten Worst ETFs

Last Updated Sep 19, 2010 11:59 AM EDT

A couple of weeks ago, I wrote that the deluge of investor cash pouring into exchange-traded funds shouldn't cause us to leap to the conclusion that the majority of those investors are embracing a traditional broadly diversified, buy-and-hold-for-the-long-term approach to indexing. Rather, I speculated, a large proportion of those investors are simply using new funds to make the same mistakes investors have always been prone to making.

So this week, I thought it might be interesting to take a look at what I consider to be ten of the, shall we say, more questionable ETFs on the market today. With more than 1,000 ETFs to choose from, the problem wasn't finding ten that were of dubious worth; the problem was stopping at ten.

And I admit that this is a highly subjective exercise -- much like debating which is the most annoying member of the Jersey Shore cast.

Nevertheless, here, in no particular order, are my nominees for the ten least useful ETFs.

  1. Direxion Daily 30-Year Treasury Bear 3x: In compiling this list, I intentionally ignored performance. Most of these funds are so highly speculative that they're as likely to go through the roof as fall off a cliff from one week to the next. But this fund's -53 percent loss over the past year starkly highlights just how dangerous the new breed of leveraged (bull and bear market) ETFs is. They're so dangerous, in fact, that FINRA ruled last year that they were unsuitable for holding periods of longer than one day. That's about as strong a warning as you're likely to ever get from a regulator.
  2. U.S. Oil: The poster child for the commodities boom, investors in this fund learned first-hand that contango isn't a dance step, but rather is an investment phenomenon that can turned a well-timed speculative bet into a losing proposition. The struggles of this fund and others like it spurred BusinessWeek to label commodity ETFs "America's Worst Investment."
  3. ETFS Physical Palladium Shares: Raise your hand if you can use "palladium" in a sentence, let alone make a case for it in the typical investor's portfolio. Beyond its possible appeal to workers in the palladium industry seeking to diversify their career risk (a rather limited market, I would think), I can't fathom a reason why anyone would need to own such a fund.
  4. CurrencyShares Russian Ruble Trust: Finally, investors seeking a way to play the Russian currency market have had their prayers answered. But with only $7 million invested in this fund, you'd likely better act quickly if you want to make a bet on the direction of the Ruble, as this fund might not be with us for much longer.
  5. PowerShares DWA Emerging Market Technical Leaders: This fund allows investors to leaven their bet on the emerging market sector with that old standby in the search for outperformance: technical analysis. You'll have to excuse me if I consider that to be less than a win/win proposition.
  6. FaithShares Baptist/Catholic/Christian/Lutheran/Methodist Values: The skeptic in me suspects that these five separate funds exist less for their investment potential than their marketing potential. The theologian in me wonders how much of a difference there could be in the investment approach of each fund. A quick scan a the vast overlap of the top ten holdings of each of these funds confirms both my inner skeptic and inner theologian.
  7. EGShares Brazil Infrastructure: How many times have you wanted to make a play on the continued deforestation of the Amazon rainforest, only to slap your forehead upon remembering that you had no easy way to do so? Well with the February 2010 debut of this fund, that final hurdle has finally been removed. Gentlemen, start your bulldozers.
  8. ELEMENTS CS Global Warming ETN: This fund is ideal for those investors tired of debating the existence and impact of climate change, and ready to put their money where their mouths are.
  9. Dent Tactical ETF: Managed by MoneyWatch writer Allan Roth's favorite self-anointed market guru Harry Dent, investors in this fund pay 1.56 percent annually for the privilege of having Dent shuffle their money around between other ETFs, based upon his outlook for the global economy. Investors intrigued by such an opportunity are strongly urged to consider Dent's previous attempt at allowing fund investors to profit from his insights. The AIM Dent Demographic Trends fund lost nearly 50 percent of its value from 2000 until it was mercifully merged out of existence in 2005. The S&P 500 in that period was off 13 percent. Call this ETF the triumph of hope over experience.
  10. Claymore S&P Global Water: Investors on the lookout for more and more exotic asset classes to play might just find a home in the previously mundane world of water. I suppose this fund might ideally be parlayed with the Global Warming ETN in the "armageddon" section of an investor's portfolio. If nothing else, this fund has one highly redeeming quality: it's highly liquid! (I know, sorry.)
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  • Nathan Hale

    View all articles by Nathan Hale on CBS MoneyWatch »
    Nathan Hale has spent decades working in the financial services industry, during which he has researched and written extensively about personal investing, the mutual fund industry, and financial services. In this role, he uses a nom de plume because many of his opinions about the mutual fund industry and its practices would not endear him to its participants.