ETFs [1] have been advertised as one of the best investment tools for the retail investors to easily take advantage of investment themes. With its low expense fees, high liquidity and flexibility, what’s not to like right?
Ever since the original ETFs came on the market (SPY, QQQ, DIA just to name a few), tons of ETFs have been created for virtually every way of investing you can think of. There’s one for investing in gold (GLD), another for investing in Hong Kong index (EWH), and there’s even one to short markets like the financials (SKF).
Be careful with ETFs
If you are like most people, then you probably invest in ETFs just based on the name. This is extremely dangerous! Let me explain by using the UltraShort Real Estate ProShares (SRS) as an example.
You’d think that with housing down huge this year, this ETF [1] that uses leverage [2] to short the market will be up big right? Wrong! In fact, with the Dow [3] Jones US real estate index down about 40% this year, SRS is down almost 50% YTD!
Reading the Fine Print
So what’s the deal? Well, if you read the fine print, you will see that SRS aims to double the real estate index’s daily performance, not double the long term performance! So, if volatility is high, virtually all gains are wiped out!
The funny thing is that this ETF actually has a yield [4] which doesn’t make sense at all! Dividends are supposed to be paid by investors shorting that particular stock, so why would an ETF that short a market be able to provide a yield when it should be paying a yield back?
Takeaway for Investors
It’s unclear why so many of these ETFs are allowed to exist because it does nothing to help investors gain confidence in this market. Before you seriously consider any ETF from now on, it is crucial to examine the fund profile and to fully understand how each ETF makes or loses its money before putting your hard earned money into the market.
Don’t ever buy into an ETF based on its name ever again!