The table below contains a roster of top-performing exchange-traded products of all stripes. For reasons that will become clear in a moment, those returns should tell you to run away.
The winners are as exotic a crew of exchange-traded funds and exchange-traded notes as you’re ever likely to find, from leveraged funds that seek to triple the return of an index to those that bet against the price of silver. The top performer, the Elements Spectrum note, follows a complex strategy based on the daily results of the 10 sectors of Standard & Poor’s 500-stock index.
What’s wrong with buying a red-hot ETF? For starters, in most cases you’ll have to make a call on a narrow sector or market. Do you really have special insights into small Indian companies or the coffee market? Okay, place your bets. Second, the volatility of these funds is off the charts. For example, Direxion Daily Semiconductor Bull 3x ETF dived 43% during the market’s 7% decline in September and October.
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Finally, leveraged ETFs can only promise to meet their goals on a daily basis. Because of the peculiarities of daily compounding, the results can be surprising. In 2011, for example, when the S&P 500 earned 2.1%, Direxion Daily S&P 500 Bull 3x Shares lost 14.9%. In short, it’s best to leave these so-called winners to professionals—and gamblers.
*Assumes reinvestment of all dividends and capital gains; three and five year returns are annualized. # Exchange-traded note. Expense ratio is the percentage of assets claimed annually for operating a fund. Source: Morningstar Inc.
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