For long-term investors, the diversification and low costs that exchange-traded funds provide can make them some of the best investments in the market. However, much like stocks, the worst ETFs can also be portfolio poison.
The most important thing for investors to do is make sure they understand exactly what they are buying. Buying and selling ETFs is as straightforward as buying and selling stocks, but while they trade like stocks, they can hold a number of complicated and unique investments that can do a lot of harm to investor returns.
Many ETFs are not designed for long-term investing at all. There are a number of ETFs out there that were created with the sole intended purpose of serving as day-trading instruments. You wouldn’t use roller skates in an ice skating rink. Yet many investors will buy and hold these day-trading ETFs hoping for long-term gains.
Here are three of the worst ETFs for long-term investors.
Worst ETFs: Direxion Large Cap Bull 3X Shares (SPXL)
I’m going to make an example of the Direxion Large Cap Bull 3X Shares (ETF) (NYSEARCA:SPXL). It’s not because it has been one of the worst ETFs in recent years. It’s because it has been one of the best.
The SPXL is a special type of fund known as a leveraged ETF. The SPXL is designed to generate three times the return of the S&P 500 each day.
On the surface, that leverage may seem like great news. S&P 500 ETFs like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) are widely considered to be some of the best long-term investments available. If you could triple the return of the S&P 500, that would be three times as good. Right?
The SPXL and other levered ETFs gain their leverage by buying and selling complicated derivatives and swaps at the end of each trading day. The goal is to triple the return of the S&P 500, good or bad, every day. The problem lies in the math.
If the S&P 500 consistently goes up over time, the SPXL will perform well. It has been excellent during the extended bull market. But when the market goes sideways, the SPXL hemorrhages value. And of course, if the S&P 500 crashes 34% during the next recession, we all know what 34% times three is.
Worst ETFs: United States Oil Fund (USO)
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