When you look through the world of investment options there are many different ETF products to choose from. The Bond ETF is one that I’ve traded frequently over recent years, it is a liquid trading vehicle with plenty of volatility. Not all ETFs are created equal though, there are some that really stink. Many of the inverse and leveraged ETFs have severely underperformed expectations. The derivatives of derivatives are the worst, ETFs based on futures contracts can dramatically under-perform. There is no way the average investor can use these and make a profit so stay away. It’s puzzling why some of the highly leveraged ETF / ETN products haven’t met with more regulatory restrictions. Alright, enough of that but I encourage you to stick to good quality products that have proven to be successful. You should stay away from the natural gas etf that uses futures contracts for exposure, you are much better off in stock or physical commodity based ones that avoid leverage. It’s easy to see this by comparing USO (oil futures) to XOP which holds stocks of oil producers, the stock based version always wins over time. Therefore, if you are interested in investing in oil focus on the oil stocks. As a rule, always look for ETFs that hold actual commodities (gold,silver,copper etc) or stocks of producers instead of futures contracts & you will be fine. You can’t go wrong following this same philosophy when it comes to stock market based instruments as well. It’s always best to make sure the ETF holdings match 100% with the ones found in the stock index it’s tracking, the ones that rely on futures for exposure should be avoided. The only futures based instrument that I really like is the Copper ETF (JJG) which has performed very well over the time it’s been around. This is just one of many good options for investing, you just have to look at the historical charts. I always go look at historical charts in order to see how it’s performed relative to it’s benchmark. In my opinion it’s the only way to really judge whether it’s something I should invest in. You can see how it performs relative to the underlying in both bull and bear market trends which is good to know. Nearly all instruments under perform indices to a small degree because of management fees and expenses. These fees don’t mean much to short term traders, but buy and hold investors should examine them closely. That’s another thing about the leveraged ones, they tend to have the highest fees and expenses. By focusing on plain vanilla ETFs that minimize their expenses, avoid leveraging and have good past performance you can win at the investment game!

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!


This entry was posted on Friday, January 27th, 2012 at 11:14 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.