3 ETFs, That, Like Hello Kitty, Are Lies

August 28, 2014

The investment world was rocked by the news today that Hello Kitty is not actually a cat. But the pernicious mislabeling of some ETFs is even worse.

ETFs are awesome, because most of the time, what you get is exactly what the label on the tin says. You want exposure to Treasury bonds with maturities longer than 20 years? The iShares 20+ Year Treasury Bond ETF (TLT | A-85) is going to give you just that. Done and dusted.

But just like many of us were shocked to learn today that Hello Kitty, that annoying/adorable Sanrio creation that’s sold countless pencil cases over 40 years, is actually a 1970s era British schoolgirl, many investors are shocked to find out that once in a while, the label on an ETF can be just as off. (And think about it, Hello Kitty owns a pet cat, so if she were a cat, Sanrio would be condoning actual slavery. And yes, it’s is the summer doldrums.)

So, who are the worst offenders of not being a cat in ETF land? Here are my top three picks:

1. Every Volatility ETF

Frequent readers will recognize my particular angst over all of the ETFs and ETNs purporting to provide exposure to volatility as a stand-alone asset class. This collection of 17 ETFs generally tracks some version of VIX futures. What’s wrong with that? It’s not really capturing volatility, except by a narrow definition (implied future volatility as traded on a single day).

They require perfect timing to work. And the persistent contango in the VIX futures market has made any buy-and-hold investor the proud owner of one of the worst investments in recorded history.

VXX

Sure, it does what it says on the tin. Most folks, however, don’t get past the whiskers.

 

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