ETF Analyst – ETFs Can Kill Your Returns, Dead

Exchange-traded funds, or ETFs, are investments that hold a basket of securities like mutual and index funds, but they trade like stocks. This means that you can trade the ETF at any time of the day. This has the downside of incurring transaction costs each time you add to your ETF portfolio, whereas mutual funds are often set up to allow you to add funds for free. Other than this downside ETFs can be a good way to be bet on different classes of asset, like gold, or a sector such as oil, or even a country such as Japan. There a wide range of ETFs for you to choose from, but this article draws your attention to one of the most dangerous types – the leveraged ETF.

Leveraged ETFs return double or triple the returns of an underlying index, and there are also Inverse ETFs, which return two or three times the inverse of an index. However, since these ETFs have their exposure to an index reset on a daily basis their returns do not correlate to the index when they are held for longer than their typical compounding period which is a day. Any ETF analyst could tell you this, but most of the suckers on main street have no idea and end up holding the investments for an extended period. (more…)