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%|
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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