The first exchange-traded fund (ETF) came onto the American financial markets in 1993 when State Street Global launched the SPDR S&P 500 (NYSE:SPY). With an average volume of over 200 million shares traded, this original ETF is still the most popular ETF traded today - but that doesn't mean it gives the best returns. (For related reading, see Introduction To Exchange-Traded Funds.)
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One of the biggest advantages of ETFs is that an investor can create a diversified portfolio using a handful of different ETFs to cover the entire stock and fixed income market. Likewise, for investors who already have a sizable portfolio of individual stocks, more specialized ETFs can be a great way to augment holdings and provide entry into a wide variety of sector, commodity, small-cap and emerging markets. Buying an ETF to represent an entire sector of the stock market can also be a great way to ride out a bullish trend on a specific sector.

However, trading in ETF does not totally eliminate the challenge of stock picking. Owning an ETF that tracks an out-of-favor sector will result in returns that significantly underperform the market.

Check out some of this year's worst-performing ETFs.

Company Net Asset Value YTD % Loss
Direxion Daily Real Estate Bear 3X Shrs (NYSE:DRV) 95.45M -67.75%
ProShares UltraShort Silver (NYSE:ZSL) 61.27M -60.35%
iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) 2.09B -57.50%
Direxion Daily China Bear 3X Shares (NYSE:CZI) 11.22M -57.39%
ProShares UltraPro Short Russell2000 (NYSE:SRTY) 25.65M -54.97%
Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA) 627.60M -52.37%

Bottom Line
It's no surprise that most of the underperforming ETFs are leveraged ETFs. In these funds, losses are compounded two- or even three-fold as a result of the leverage used. This means that they will suffer more than similar ETFs that don't use leverage. (For related reading, please see Dissecting Leveraged ETF Returns.)

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