Worst ETFs of 2010 – You’ll Be Surprised

by ETF Base on September 10, 2010

While 2010 has to date been a relatively flat year for the developed market indices and some of the emerging markets are up big, like the Colombia stock market, there has definitely been some volatility in particular sectors like Financials, Real Estate, Bonds and Treasuries.  At first glance, you might expect that the worst performing ETFs might be the inverse of all these strong performers but upon further review, even some indices that are roughly flat on the year house some of the worst performers in the leveraged ETF category and you’ll also note ETFs based on futures due to the futures roll and contango.  Let’s take a look at ETFs dropping around 30% or more on the year:

DRV Direxion Daily Real Estate Bear 3X Shrs  -62.0%
TMV Direxion Daily 30 Yr Trsy Bear 3X Shares -48.9%
VXX iPath S&P 500 VIX Short-Term Futures ETN -43.5%
SRS ProShares UltraShort Real Estate  -42.0%
GAZ iPath DJ-UBS Natural Gas TR Sub-Idx ETN  -39.9%
CZI Direxion Daily China Bear 3X Shares  -39.6%
UNG United States Natural Gas   -36.7%
TBT ProShares UltraShort 20+ Year Treasury  -36.1%
TZA Direxion Daily Small Cap Bear 3X Shares  -34.6%
PWND PowerShares Global Wind Energy   -34.2%
UNL United States 12 Month Natural Gas  -34.0%
MWN Direxion Daily Mid Cap Bear 3X Shares  -33.9%
EDZ Direxion Daily Emrg Mkts Bear 3X Shares  -33.4%
TYO Direxion Daily 10 Yr Trsy Bear 3X Shares -33.2%
FAN First Trust Global Wind Energy   -33.2%
LHB Direxion Daily Latin America Bear 3X Shs -31.3%
GLL ProShares UltraShort Gold   -29.0%

Some Surprises!

So, while it wouldn’t be unexpected to see DRV losing quite a bit given the real estate stock rebound this year, it’s interesting to note that while DRV lost 62% on the year, guess what it’s inverse did (the long 3X real estate DRN)?  DRN didn’t gain 62%.  Not even close.  It gained 31%.  Why?  It’s due to the mathematical certainty that due to daily resets, leveraged ETFs lose value over time.  I highlight this often, but it’s worth repeating.

What isn’t always so obvious is that some ETFs and ETNs (exchange traded notes often show up in ETF lists) that are based on futures contracts tend to underperform the index they’re based on as well.  Think you’re hedging you’re oil price?  Maybe you’re just losing value no matter what.  Think you’re hedging volatility long-term?  You’re probably just giving away a few bucks a day in lost value.

  • The VIX– This volatility index opened the year at around 18 and currently resides at 23, yet the ETN meant to mimic this index is one of the year’s worst performers!  How is this?  What should have been a double-digit gain is actually a decent loss on the year.  This is due to the futures roll, which investors should expect in these types of ETNs.  Aside from perhaps buying on a day where you anticipate some sort of massive crash (which is a loser’s game for the most part), there’s no real value in holding these long-term – then only decline in value. 
  • Wind– Another surprise in there was the Wind Energy ETF PWND, losing 34% on the year.  While oil prices have held roughly steady and with a green president in office, you’d think alternative energy ETFs would have at least held their ground this year, if not outperformed.  But alas, not the case.  Perhaps the underlying issues had too much potential built into share prices from 2009 or the realization that state-sponsored green programs eventually collapse like what we saw in Spain.  Either way, really bad performer year to date in the context of a roughly flat broad market.

The key takeaway here is that retail investors continue to chase trends and catchy strategies without understanding what the actual investment instrument is likely to do, even under their assumed market conditions.  Buyer Beware!

Disclosure: No long position in any ETFs mentioned here; paired short positions in DRV, TMV.

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