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New Inductees For ETF Hall Of Shame

Paul Baiocchi

Sometimes a product is so crazy, you think to yourself:This might just work. Other times, you think to yourself:Why not douse my money in gasoline and light it on fire instead?

Over the past couple of weeks, our Analytics team has been focusing on leveraged and inverse ETPs, a pocket of the market that has been somewhat polarizing in recent years—to put it mildly. While we do see a utility in these products when used properly and when they’re deep enough to make the tactical trading they were designed for practical, we have stumbled upon some truly awful products.

The following list is a collection of ETPs with a strategy that is completely bonkers; a lack of liquidity that makes them nearly un-investable; or a structure that actually undermines the strategy’s effectiveness.

Without further ado, I present to you the ETF hall of shame:

Barclays Short B Leveraged Inverse S'P 500 TR ETN (BXDB)

This one is a true gem. This ETN charges 40 basis points a year (plus an embedded financing charge), and at launch it promised to provide unleveraged inverse (-1x) exposure to the S'P 500. On the surface, that sounds like a reasonable strategy, and at a competitive cost. Unfortunately, there is no reset—daily, monthly or otherwise—so the leverage factor can vary greatly over time. Case in point:The current participation rate for BXDB is 4.5—that means that anyone buying BXDB will get -450 percent of the return of the S'P 500 for as long as they own the note. For investors to get access to this unpredictable ETN, they must contend with the fund’s 51 basis point average spread. Thankfully, few people have bought into this tire fire, as the note has less than $3 million in assets under management. Considering that Barclays recently shuttered its sister note, the Barclays ETN+ Short C Leveraged Exchange Traded Notes (BXDC), it may not be long until this horse is put out to pasture.

Claymore CEF-Linked GS Connect ETN (GCE)

This ETN is in many ways an outlier for the ETF industry. First of all, it tracks a basket of closed-end funds. The idea of using an exchanged-traded note to get (notional) access to a basket of CEFs may sound crazy in and of itself. To be fair, the idea of buying a basket of CEFs with the best liquidity that trade at discounts is not crazy. What is crazy is the fact that the issuer—Goldman Sachs—doesn’t even provide a home page for the ETN. In other words, the only information available on this complex “fund-of-funds” ETN is the fact sheet and index methodology provided by Guggenheim, which acquired Claymore. Let me say that one more time:To get information on an ETN issued by Goldman Sachs, which tracks an index built by Claymore, you must go to the Guggenheim website. By all means, if you want to own this product, feel free to brave the fund’s 86 basis-point average spreads and 95 basis point expense ratio. Somehow, there is nearly $10 million invested in this thing.



Market Vectors BDC Income ETF (BIZD)

Before I get too far into this one, it’s worth mentioning that one of the benefits of the immense growth in the ETF industry has been the access it has opened up to investors. Investors can now invest in everything from corn to homebuilders to VIX futures in an easy-to-understand structure. That does not necessarily mean they should. Take BIZD for example. The fund tracks an index of 26 business development companies (BDCs) that inhabit a very specific section of the tax code. These firms are, in essence, private equity firms, which is without a doubt an interesting pocket of the market. The problem is that owning these firms is extremely expensive, as evidenced by BIZD’s 7.56 percent expense ratio. This fee takes into account acquired fund fees, which anyone owning these firms individually would have to pay. The high fee is by no means an indictment of BIZD per se, but it does create a massive hurdle investors must overcome to justify holding the fund. Since launch, the fund is up just 1.5 percent, while the S'P 500 is up over 9 percent. Making matters worse, those are total return figures, and part of the attractiveness of BIZD is the high yields these firms throw off. Private equity investing may be your cup of tea, but the high fee and wide spread on BIZD make it a very expensive proposition.

Teucrium Agricultural Fund (TAGS)

This fund-of-funds is on this list mostly as a result of the lack of success of the four ETFs it holds. In that way, it feels a bit unfair to include TAGS in this list, but when a product carries an average spread of 660 basis points, and holds four ETFs with expense ratios of 100+ basis points each, it’s hard not to put it in the hall of shame. While an equal-weighted agriculture ETF tracking corn, soybeans, wheat and sugar would be extremely attractive in a vacuum, TAGS fails to provide investors with a cost-effective solution to get this balanced exposure. The wide spreads are a problem to be sure, but the tracking challenges that come from holding four expensive and illiquid ETFs further undermine the fund’s ability to provide anything resembling a practical investment vehicle.


All of these products were likely designed with the best intentions. Unfortunately, the old saying “Hell is paved with good intentions” rings true here.

These funds are a toxic mix of expensive, unpredictable and inefficient—none of which are words that should describe anything relating to your investment portfolio. Investors would do well to avoid these products altogether, unless of course they’re looking for ways to generate losses in their accounts. In that case, I don’t have any good advice for you. As they say, a fool and his money …

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at pbaiocchi@indexuniverse.com, and follow him on his Twitter handle, @BaiocchiPaul.

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