Best Performing ETFs Can Bite You

I admit it: I wish I’d bought the Direxion Daily Gold Miners Index Bear 3x Shares (DUST), which is up 72.63% so far this year. The fund is the top-performing ETF year-to-date as of Sept. 17 in the top 100 performing ETFs [see below].

DUST seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the NYSE Arca Gold Miners Index. In a horrible year for precious metals and mining funds, borrowing heavily to bet against precious metals and mining stocks won big.

Had I invested $100,000in the beginning of the year, I’d have made more than $72,000. The Monday-morning quarterback voice in my head is saying “buy” but I know it’s the emotional part of my brain speaking. It’s coming from the same place that tells me gold is dead, as bitcoin is the new gold. I could probably even convince myself I was being rational.

Analyzing The Top 100

In looking at this “top performing” list, I see many things in common. First, the ETFs take on a ton of risk. Rather than investing in broad holdings such as a total stock index fund, they’re all quite narrow. Many magnify the risk by borrowing to buy more and going short against the market. This isn’t investing, it’s merely speculation.

Next, the fund families with the most listings tend to be small, gathering very little in the way of investor assets. ProShares had the most funds in the top 100, at 17, with Direxion in second place, with 12.

ProShares has about $30 billion in assets, while Direxion had about $12.5 billion. Combined, they make up about 1% of the total fund assets at Vanguard (mutual funds and ETFs combined).

The reason they represent such a small percentage is because the strategy of maximizing risk doesn’t work. If you look at the 100 worst-performing ETFs [see below], both fund families score even “better” on this list, with ProShares at 23 and Direxion at 25.

In fact, the Direxion Daily Gold Miners Index Bull 3x Shares (NUGT) is No. 3, losing 60.23%. This means you’d need a 151% return just to break even. These fund families tend to be small because people are generally pretty wise.

Finally, funds on the list tend to be very expensive. DUST, for example, has a 1.08% annual expense ratio, and that doesn’t include the cost of leverage. That’s dozens of times more expensive than broader ETFs that don’t follow these gambling strategies.

Math Here Not Your Friend

Between the extreme volatility and the fees, the math is heavily against you. Consider that if you lose 90% of your money (as the REX VolMAXX Short VIX Futures Strategy ETF (VMIN) has so far this year), you need a 1,000% return to get back to even.

A much better approach than picking from a top-performing fund list is to select a broad, ultra-low-cost ETF such as the Vanguard Total Stock Market ETF (VTI) that will never make a top-performing ETF list in any given year. That’s because they don’t take uncompensated risk.

But a funny thing happens over many years; they rise to the top. According to Morningstar, VTI has bested 90% of ETFs over the past 15 years. And that top-decile performance would be even better if the hundreds of ETFs that went defunct were included in the comparison. I think it’s safe to say those funds that closed weren’t the best performers.

My advice is to separate gambling and investing. In the long run, choosing an investment based on past performance is bad, but choosing based on top performance is even worse. You’d probably have better odds in Las Vegas and have more fun. These funds don't even give you comp drinks or show tickets.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.

100 Top-Performing ETFs

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100 Bottom-Performing ETFs