While certain exchange trade funds have enabled many investors to achieved diversified exposure to equities, the more esoteric, specialized or niche ETFs that have sprung into existence ? there are more than 1,000 of them — have created traps for the unwary, according to Alex Tarquinio’s WSJ article entitled “The Perils and Pitfalls of ETF Investing.”
These niche ETFs (such as leveraged and commodities ETFs) often contain complex derivatives of assets rather than the assets to which they are purportedly linked. As a result, these ETFs do not track those assets closely, as investors have been led to expect. The variance in performance between a leveraged ETF and the assets it is supposed to track can be quite large.
Leveraged ETFs are unusually volatile and high-risk. They are designed for day-trading and unsuitable for buy-and-hold investors.
All 52 leveraged ETFs in existence since Jan. 1, 2008, have lost money, according to the article citing Morningstar, even those where the underlying index has risen over the same time frame!
Approximately 140 ETFs have shut down since the beginning of 2008, according to the article. These are typically ETFs that have not attracted enough capital to make it profitable for the managers.
When an ETF closes, shareholders can wind up paying new commissions and fees for a new investment to replace the closed fund, as well as capital-gains tax on any shares worth more than they initially paid. Investors should be very wary of these niche ETFs.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in ETF claims. For further information, please contact us.