The ETF (exchange traded fund) landscape is littered with failed investment fads, gimmicks, tricks, niche ideas, and junk. In 2017 alone, 150 ETFs were closed for failure to attract enough investors – which normally happens for funds that fail to perform.
Back around 2011, I learned of an ETF with great promise. A smart researcher designed it using market timing models on a very diverse asset classes and I bought some right away. While many of the asset classes were going up, this dog went nowhere for a year until I dumped it. Once a year, I’d check and it remained flat for 6 years until it finally closed for lack of investor interest. ETF management companies throw spaghetti at the wall with all kinds of niche products. A few of the ETFs that closed last year include these fund ideas:
- Double inverse silver mining companies fund
- Stock-price splits fund
- Regional banking fund
- Solar energy fund
- Spanish large-cap fund
- Municipal bond fund with 12-17 year expiration
Under-performance is one problem but a larger problem can be a structural weakness of a fund. For example, how would you like to own the ETF in the chart above? One day it is at $125 and a week later it has fallen by 90% to $11. This is an inverse volatility fund and there is a whistleblower with details regarding fake volatility quotes (called spoofing) that is allowing risk-free profits to scammers. Other funds, such as low-volatility versions of the S&P 500 fell just as violently as the regular S&P 500 over the last month. Investors in this fund were giving up some upside capital-gain potential in exchange for price stability, but the moment you actually need that stability, it disappeared.
As I see it, there are tactics and strategies that work in specific market environments. But when that environment changes, these strategies frequently fail. Until there is a long track record of validated success for an investment strategy, it is best to stick with what has worked for decades, rather than chase the gimmick of the season.