Investments to Avoid

fearEvery year, the Morningstar mutual fund tracking organization releases a list of the worst new ETF investments—and generally, these tend to be trendy new offerings that are designed to catch the eye of investors who are responding to yesterday’s  headlines rather than their long-term economic future.

This year’s top nomination is something called the VelocityShares Leveraged Crude Oil ETN, closely followed by the VelocityShares 3x Inverse Crude Oil Fund.

What do you get when you invest in these shares?  Every day, the VelocityShares products give you  three times the daily movements of the price of oil on the global markets.  The first fund gives you three times the amount that the price changes in the same direction, while the second gives you three times the movement in the opposite direction.

Set aside the fact that there is no conceivable reason why you would want daily exposure to an investment as volatile as crude oil.  For the moment, ignore the fact that the typical portfolio already has plenty of oil exposure, since energy companies are among the largest of the large caps, and just about every U.S. and global organization uses energy as one of its major expense items.

The bigger problem with these shares is that the more volatile an investment is, the lower its long-term performance will tend to be in dollar terms.  When a stock or ETF goes down 50% and then back up 50%–and this could happen in a week with these shares—the round trip delivers you a 25% loss.  Lather, rinse and repeat, and you’re looking at an underperforming asset—at three times the normal velocity.

What else did Morningstar single out?  You might also consider avoiding the Whisky & Spirits ETF.  Not only is this portfolio concentrated on a small component of a much larger business sector, it is even highly-concentrated within the small realm of alcoholic beverages.  A single stock accounts for 23% of the portfolio, and its top 10 holdings comprise 79% of the total dollars invested.  And for this absurd lack of diversification, you pay 75 basis points a year—as much as you might pay for a diversified international fund.  Why not just buy your own distillery instead?












About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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