The 10 Weirdest ETFs You Can Buy

By Tim Lemke on 15 July 2015 0 comments

If you read Wise Bread often, you'll know we're big fans of exchange traded funds, known as ETFs. They are great vehicles for broadening and diversifying your portfolio, and offer some advantages over mutual funds. (See also: 8 Ways ETFs Can Put More Money in Your Pocket Than Mutual Funds)

But as ETFs have grown in popularity, they've also grown in number. And that means there are some very strange ETFs out there. Being weird doesn't make an ETF bad, necessarily, but all too often these unique ETFs are too specialized or complicated to be useful to the average investor. And many of them just aren't good performers.

Here's an examination of some of the weirder ETFs out there, with reasons why you shouldn't bother investing in them.

1. High Volatility or Beta ETFs

These ETFs give you exposure to companies that are uniquely sensitive to the ups and downs of the market. Examples include Powershares' S&P 500 High Beta Portfolio ETF [SPHB] or its High Beta Emerging Markets Portfolio ETF [EEHB]. In theory, these ETFs can help you make more money when markets rise, but it could also mean bigger losses during bear markets. If you're investing for the long term, your goal should be to smooth out the ups and downs, not embrace wild swings. Unless you enjoy getting ulcers, stay away from these ETFs.

2. Inverse ETFs

The idea here is that you are betting against an index, so you can make money during a bear market. Perhaps it makes sense for a short-term investor, but it does not make sense for the typical investor looking to grow wealth over the long term. It's true that stock market can take a nosedive from time to time, but it's very hard to predict exactly when. Over time, markets go up, so let that guide your investment strategy.

3. ETFs for Obscure Countries

For the average investor, there's really no good reason to own an ETF centered solely on, say, Qatar. Look instead to ETFs with a broad exposure to international and emerging markets. The iShares Total International ETF [IXUS] is a good one, as is the iShares Emerging Markets ETF [IEMG].

4. Leveraged ETFs

A leveraged ETF can help you get amplified returns, because they take advantage of borrowed money. Think of it as a simpler way to trade on margin. Popular leveraged ETFs include the Daily S&P 500 Bull 3x ETF [SPXL] and the Ultra S&P 500 ETF from ProShares [SSO]. Leveraged ETFs aren't bad, but they're not great for a typical investor who's looking for steady and long-term growth. That's because any time you're trying to boost returns through borrowing, you may also see amplified losses.

5. Ultra-Specific Sector ETFs

It's sensible to try and diversify your portfolio by investing in a mix of sectors, such as energy, health care, and technology. But it's possible to get too crazy with it. An ETF for the broad materials sector is fine, but there's no need to delve deep into the agribusiness sector. A general energy ETF will help your portfolio, but do you need specific exposure to solar companies? The impact of these investments could be positive, but relatively miniscule, so don't complicate things for yourself.

6. Advisorshares GlobalEcho Fund [GIVE]

There's nothing wrong with socially responsible investing, but it's probably best to stay away from this particular ETF, which focuses on investments "that may technologically, socially, and environmentally impact the earth positively." The ETF's performance is up barely more than 1% in 52 weeks, and its expense ratio of 1.61% is far higher than most ETFs. To find better performance and lower expenses, consider investing in iShares MSCI KLD 400 Social Index Fund [DSI] instead.

7. S&P 500 VIX Short-Term Futures ETF [VXX]

I have to admit, I don't really understand this ETF. And I doubt most investors will. Dow Jones says the ETF "utilizes prices of the next two near-term VIX futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts." Got it? Me neither. But I do understand price performance, and this ETF has lost nearly all of its value over the years. Stay away.

8. Market Vectors Gaming ETF [BJK]

This is an ETF that tracks the performance of some of the largest casino companies, including MGM Grand, Las Vegas Sands, and Galaxy International. Many of these aren't bad companies, per se, but this far too specialized an ETF for most investors. Not to mention, anyone who did invest in this ETF in recent years hasn't exactly hit the jackpot. Shares are down 27% over the last three years, and are up just 6% in three years.

9. Exchange Traded Managed Funds

Part of the attraction to ETFs is that they are passively managed and their investments are clearly advertised. But there is a new push for approval of managed ETFs, or ETMFs. In theory, these investments have a chance to outperform an underlying index because they are actively managed. But there's a growing body of evidence that asset managers can't beat the market on a consistent basis. You're better off with an ETF that's simpler and more transparent.

10. Yorkville High Income Infrastructure MLP Index ETF [YMLI]

This ETF tracks the movements of select energy infrastructure master limited partnerships. That's a mouthful, and it's pretty unlikely the average investor needs anything that specialized in their portfolio. What's more, this particular ETF has an astonishingly high expense ratio of 5.91%.

Do you have any unique or interesting ETFs in your portfolio?

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