There’s an ETF for That — or Not

Morningstar’s annual ETF report finds that as of December 6, 2016, 220 new exchange-traded products (ETP) (inclusive of exchange-traded funds and exchange-traded notes) were launched in the U.S. market in 2016. This places 2016 fourth behind 2007, 2015 and 2011 in terms of total number of new ETP launches in a given calendar year. There are now a total of 1,957 ETPs available to investors.

Since the SPDR S&P 500 ETF (SPY) was launched in 1993, 2,531 ETPs have been brought to market. Nearly 23% of these products have been closed. Generally, as Morningstar’s “Worst of 2016” list indicates, ETPs that perform poorly, fail to gather assets and ultimately close. They tend to be trendy products tied closely to current headlines rather than designed for the long-term.

Morningstar’s pick for 2016’s least successful ETF is the VelocityShares Leveraged Crude Oil ETN, closely followed by the VelocityShares 3x Inverse Crude Oil Fund. These VelocityShares products give you three times the daily movements of the price of oil on the global markets. The first delivers three times the amount that the price changes in the same direction, while the second offers three times the movement in the opposite direction. I’m not sure who would want to introduce three times the volatility.

Morningstar also dissed the Whiskey & Spirits ETF (WSKY). According to ETF Trends, WSKY seeks to reflect the performance of the Spirited Funds/ETFMG Whiskey & Spirits Index, which is comprised of companies that are whiskey and/or spirit distilleries, breweries, and vintners and related luxury goods companies engaged in the sale of whiskey or the production and sale of mixers for use with premium spirits, according to a prospectus sheet.

However, WSKY is not as diversified as it sounds. Not only is this portfolio concentrated on a small component of a much larger business sector, it is highly concentrated within the small realm of alcoholic beverages. That is, a single stock accounts for 23 percent of the portfolio, and its top 10 holdings comprise 79 percent of the total portfolio. What’s more, investors pay up to invest in something trendy; the ETF has a high expense ratio of 75 basis points a year.

The rest of the 2016 worst-performers list features an eclectic mix of funds, several of which are single-country ETFs. The Global X MSCI Nigeria ETF lost 33.3% on a year-to-date basis, the worst performance among any single-country fund.

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