Unhealthy ETF Investments - dummies

By Russell Wild

The first truly loony ETFs hit the market around 2006. At that time, a dozen funds came on the marketthat invested in companies involved in treating specific diseases. You could have invested in the Ferghana-Wellspring (FW) Derma and Wound Care Index Fund, or the FW Metabolic-Endocrine Disorders Index Fund, or the FW Respiratory/Pulmonary Index Fund.

The challenge of investing in such a small niche market is that it’s a flip of the coin to say which way your investments may head. Should a cure to cancer be found, the company that nails it will see its stock skyrocket, for sure. The other however-many companies? Their stocks may well plummet.

Well, the market saw thorough the craziness of these funds, few people bought them, and the funds have since folded. But many more crazy ETFs have taken their place . . . and many of them, if not most, track industry sectors.

Because commodities have been hot (and investors just love what’s hot), we’ve seen lately the arrival of funds that allow you to invest in every conceivable individual commodity, from aluminum and potash to uranium.

Many sector funds are leveraged, promising to generate — for better or worse — some multiple of their underlying index’s returns; they bear names like the Direxion Daily Natural Gas Related Bull 2X Shares (GASL). Or they are inverse funds, moving opposite to their index, such as the PowerShares DB Crude Oil Short ETN (SZO).

Or they are inverse and leveraged, such as the Direxion Daily Gold Miners Bear 2x Shares ETF (DUST — a ticker symbol that could end up being an apt description of the fate of invested capital). Other exotic sector funds represent narrow sectors within small stock markets, such as the Global X Brazil Financials ETF (BRAF).

Most of these inverse/leveraged/tiny-sliver-of-some-market funds are not only crazy to begin with (unless perhaps you are a very seasoned trader with vastly superior information, but they charge ongoing fees that are three, four, or five times what most ETFs charge. Keep your portfolio healthy, and avoid these gimmicky funds. Please.