2017 was a good year for investors as the S&P 500 increased 19.42%, but unfortunately, not all investors saw their investments grow in value during the year. Investors who had purchased some different Exchange Traded Funds saw their investments nearly disappear during what will be referred to as an “up” year for investors and the stock market.
What is not surprising though is that seven of the nine most prominent ETF losers of 2017 had something to do with investing in the Volatility Index. The worst performer was the ProShares Ultra VIX Short-Term Futures ETF (UVXY), falling 93.96%. This fund provides 2X exposure to short-term, first and second month, VIX futures. The UVXY is a fund essentially will offer investors a way to make money if the VIX itself increases. Furthermore, because this fund is leveraged 2X, if the VIX increases by 10%, UVXY investors will make 20%. But, due to the fund's exposure, it has high carrying costs, meaning investors who hold the fund for more than one day will lose money due to those roll costs.
Therefore, the UVXY needs both the market to be volatile regularly for investors to make any money, even over a small period of time. In 2018 its unlikely UVXY will lose as much as it did in 2017 because the end of 2016 was highly volatile following the election of President Trump.
Regardless though, the fact that seven of the nine worst performing ETFs of 2017 should tell investors that VIX ETFs are not a great investment, especially in calm market years. Now a year when uncertainty and volatility are running ramped, investors may do well with VIX ETFs, but if you knew when those years were coming, there would still probably be easier ways to make money.
The other two big ETF losers in 2017 were VelocityShares 3X Long Natural Gas ETN (UGAZ) and the Direxion Daily S&P Biotech Bear 3X ETF (LABD).
The UGAZ invests in natural gas as a commodity and was leveraged 3X, not a great investment when we saw natural gas start the year at $3.86 and finish at $2.93. Like UVXY, UGAZ also has high carrying cost, meaning investors should hold this ETF for longer than a day or so. But, while UVXY was leveraged twice, UGAZ was leveraged three times, meaning if the price of natural gas changes by 1%, UGAZ changes by 3%. Lastly, the VelocityShares 3X Long Natural Gas ETF was long natural gas, meaning investors who thought the price of natural gas would go higher, bought this ETF. The price of natural gas fell more than 20% in 2017, that combined with 3X leverage and high carrying costs, UGAZ lost 84.37% in 2017.
The opposite occurred with our last loser, the Direxion Daily S&P Biotech Bear 3X ETF. This ETF lost 75.61% in 2017 after the biotech industry had a killer year. Since LABD was a bearish investment, its value declined as the price of biotech stocks rose.
The key thing to remember when we look at a list of losers is not how lucky you are that you didn’t own these investments, is the why behind the declines. If you run a screener for all the top ETF losers in 2017, the first 20 will all be leveraged ETFs. Now, while the flip side is usually also true, (leveraged ETFs will also be the best winners of 2017) investors need to remember that using leveraged products is not always the best idea.
Investors need to understand the amount of risk they are taking on when they purchase these products. Risk not only from the fact that they are leveraged two or three times, but that they have high roll costs and expense ratios associated with them. For example, each of the three ETFs on the list above has an expense ratio of more than 1%. A standard S&P 500 Index ETF will cost you less than 0.1% today.
Its unlikely 2017’s losers will be 2018’s, and the same should also be said about last year’s winner, so don’t avoid all the names on this list or jump into last year’s winners. But, take the history and learn from it and make yourself a 2018 resolution that you will invest more in your future.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold any ETFs mentioned at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
