Market Overview

Low Volatility, Bearish Bets Put A Damper On These ETFs This Year

Low Volatility, Bearish Bets Put A Damper On These ETFs This Year

With 2017 nearly in the books, it's safe to say this has been another banner year for exchange-traded funds. The ETF industry shattered previous annual inflows records with a couple of months left in the year as advisors and investors continued migrating to low-fee ETFs.

The S&P 500 and the MSCI EAFE Index are up 19.5 percent and 21.5 percent, respectively, year-to-date. There are a few such funds, however. The search for truly egregious offenders -- those ETFs that are down 75 percent this year -- yields six such funds, according to Finviz data. That's a minute percentage of the more than 2,200 exchange-traded products listed in the U.S.

Here's a look at some of this year's worst-performing ETFs.

Bad To Be A Biotech Bear

The S&P Biotechnology Select Industry Index is up nearly 45 percent this year, meaning being short the stocks in that index or short an ETF tracking that benchmark has been an ill-advised strategy. Imagine applying leverage to a bearish strategy on the S&P Biotechnology Select Industry Index.

That's what the Direxion Daily S&P Biotech Bear 3X Shares (NYSE: LABD) does. LABD attempts to deliver triple the daily inverse returns of the aforementioned biotechnology benchmark. The ETF is down about 77 percent this year.

That performance isn't a negative commentary on LABD. LABD usually does what it's supposed to do, which is mirror triple the DAILY inverse returns of S&P Biotechnology Select Industry Index. However, LABD's 2017 slide is a reminder that traders new to leverage ETFs need to remember this important lesson: leveraged ETFs are best used as intraday trades and shouldn't be held over the course of an entire year.

Choking On Fumes

Prior to a nice day earlier this week, natural gas and the related ETPs were languishing through another miserable year. The United States Natural Gas Fund (NYSE: UNG) entered Dec. 27 with a year-to-date loss north of 44 percent.

That's painful, but not nearly as painful as the 2017 losses accrued by some leveraged natural gas products. The most egregious offender is the VelocityShares 3x Long Natural Gas ETN (NYSE: UGAZ). Even with a 10.7 percent gain yesterday, UGAZ is lower by more than 77 percent this year.

Long natural gas was mostly a bad idea this year. Adding leverage to that trade made a bad situation worse. UGAZ proves as much.

Another Awful

The pantheon of really bad investment ideas in 2017 includes being long volatility. Yet, some trades continued tempting fate with the iPath S&P 500 VIX ST Futures ETN (NYSE: VXX), which is down 72 percent year-to-date.

Underscoring the point that leverage and long volatility are a toxic cocktail in 2017 is this nugget: four of the ETPs down at least 75 percent this year are leveraged bullish volatility products.

The VelocityShares Daily 2x VIX ST ETN (NYSE: TVIX) is “just” a double-leveraged fund, but it has managed to lose more than 90 percent this year. As recently as August, TVIX traded above $24. It will be lucky to close the year above $6.

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