The Worst New ETFs of 2007
Our list of the ill-conceived and sublimely wacky ETFs that launched last year.
Our list of the ill-conceived and sublimely wacky ETFs that launched last year.
Last week we presented our short list of the "Best New ETFs of 2007." But when the ETF universe nearly doubles within 12 months, as it did last year, there are bound to be some duds. So, we'd be remiss if we didn't also tally up the worst that 2007 had to offer. These are ETFs that for reasons of (poor) timing, (nosebleed) valuation, or other factors (inexplicable daffiness) left us straining for adjectives.
"Don't Tase Me, Bro!"
ETF providers launched a number of funds in categories that, to put it charitably, looked frothy entering 2007. Emerging markets and real estate topped that list, though natural-resources funds weren't far behind. All told, 72 such ETFs launched in 2007.
No, there's not necessarily cynical intent behind all of these launches. For instance, some can argue that despite their strong run, commodities aren't yet stretched given seemingly unquenchable worldwide demand and constrained supply.
Yet, too often investors pile into offerings like the following just as performance--which had been white-hot only months before--is about to cool off, and they get burned in the process.
Timber!
And then there are the funds that seem calculated to exploit investor fears, or simply misinformation. For instance, we've seen a bevy of "water" funds (more on that below), a nuclear energy fund, and even a "global vaccine" fund. Yet, we're giving the booby prize to Claymore Clear Global Timber (CUT), an ETF that launched in November 2007.
Timberland investing--that is, investments in timber forests--has been all the rage among institutional investors, who have been enraptured by the commodity's sturdy fundamentals and low correlation with major asset classes. Yet, there's a big difference between investing directly in timberland and taking a stake in publicly traded forest product companies like International Paper (IP), which is what the Claymore fund does. How big a difference? The Campbell Group, which is a large timberland investment manager, estimated that timberland returns are weakly correlated with those of paper and pulp producers, meaning that the latter is hardly a substitute for the former. In short, there are a number of factors--such as capacity, cost efficiency, exchange-rate fluctuations, and capital-intensiveness--that drag on the returns that any of the paper producers earn from their timber portfolios.
One wonders if investors considering the fund as a "timber" play--likely because they've heard about timberland-investing's supposedly virtuous traits--realize this. We doubt it.
Fund Ideas That Were Formerly Weird, But Which Now Occur with Such Frequency That They Have Come to Seem Normal (Inspired by "News of the Weird")
These are the ETFs that defy ready categorization but for their all-too-familiar brand of wackiness (only in the ETF world would you dare call a water ETF "passe"). Here were a few of this year's prevalent themes:
Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.
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