4 ETFs With Long-Term Fundamental Flaws (UNG, KOL, TAN)
What looks good today may not look good tomorrow and what looks bad today can certainly look worse rather quickly. That speaks to differentiating between legitimate value and value traps both with stocks and ETFs.
And while one man's trash can legitimately be another man's (or woman's) treasure in the financial markets, some stocks and ETFs are so deeply fundamentally flawed that even long-term investors will have their patience tried by getting involved with these securities.
We're not saying go out and short the following ETFs immediately, but reading the tea leaves here indicates the long-term path of least resistance very well could and should be lower barring a miraculous change in fundamentals.
Market Vectors Coal ETF (NYSE: KOL) Granted, the EPA's recent proposals to block future construction of coal-fired electric utility plants in the U.S. are just that: Proposals and there are no guarantees a proposal becomes law on Capitol Hill. Even if the proposals do become law, they do not impact coal-fired plants currently in operation or those currently under construction.
The problem for KOL and its U.S.-based constituents is that a shift away from coal to cheaper, cleaner natural gas by electric utilities is already underway, putting an added burden on U.S. coal producers to increase their production of metallurgical coal. Increasing metallurgical coal production presents a two-fold problem for KOL.
First, not all U.S. coal companies operate in regions with ample metallurgical coal reserves. Second, met coal demand is driven by emerging markets, primarily China and India. Put another way, KOL could be facing a real catch-22 over the long-term. Maybe increased mergers and acquisitions activity will save KOL, but that's a risky bet to make.
United States Natural Gas Fund (NYSE: UNG) Yes, there are plenty of good reasons to increase natural gas use in the U.S. and the evidence is compelling that nat gas needs to be a more prominent part of the transportation fuel equation in this country. It's cheap, clean and the U.S. is a leading producer of the fuel meaning we don't have to import it from nations that aren't exactly all that friendly to the West.
Even if all of the political hurdles are cleared in the near-term, there's still a massive amount of excess supply that would need to be consumed before supply/demand dynamics would benefit UNG. Even then the fund's constant rolling of futures contracts leads to punitive expenses that can drain returns.
Guggenheim Solar ETF (NYSE: TAN) If the Guggenheim Solar ETF cannot flourish in a time of triple-digit oil prices and with a U.S. president that is partial to the alternative energy industry, then when will this fund be worth a look? Never say never when it comes to the financial markets, but "never" might just be the answer to when it will pay to be bullish on TAN again. Between China, Europe and the U.S., there are just too many dark clouds hanging over the global solar industry.
iShares MSCI Italy Index Fund (NYSE: EWI) Poor demographics, namely a low birthrate, and one of the highest developed market debt/GDP ratios are just two reasons Italy is tough place to invest these days. One of the two "I's" in PIIGs is officially in a recession and the government isn't exactly stable by developed market standards. We recently warned EWI's dividend yield was due to jump and that thesis has been validated.
Can Italy and EWI rebound sometime in the next few years? Anything is possible, it's just a matter of how long one is willing to hold this dog of an ETF waiting for decent profits.
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