While we all know the saying, 'past performance is not indicative of future results', taking a look back at what happened in the past is always a smart move. That is because as the other saying goes, 'those who do not know history are doomed to repeat it.' And the past mistakes we are about to discuss are certainly not mistakes you want to be repeating anytime soon.
So now that 2016 is over, let's take a look at a few of the worst performing Exchange Traded Funds during the year and see what we can learn from these epic failures.
The biggest Exchange Traded Fund loser of 2016 was Direxion Daily Junior Gold Miners Index Bear 3X Shares ETF (PACF:JDST) which lost an astonishing 97.95% of its value in 2016. The three times leveraged bear portfolio ran into a buzz saw in 2016 and lost investors some serious capital. At its last reporting the fund only had $84 million in assets under management, which is scary for a fund that has an inception date in October 2013. JDST attempted to inverse exposure to the Market Vectors Junior Gold Miners Index, which is a market capital weighted index of mining companies that receive at least 50% of their revenue from gold or silver mining. Furthermore, the index caps exposure to silver mining companies at 20% each quarter, meaning the index is 80% gold mining.
The MVIS Global Junior Gold Miners Index that JDST tracks lost 77.04% during 2016. But the fact that the leveraged product must reset daily in order to gain the three times exposure, is why JDST performed worse and is a perfect example of how leverage products deteriorate over time and are not suitable long-term holdings.
Lastly if you owned JDST, don’t fell too bad or think you just picked a bad bearish gold ETF because the Direxion Daily Gold Miners Bear 3X Shares ETF (PACF:DUST), another leveraged bearish gold ETF, was the third worst performing ETF of 2016 losing 94.75% during the year and that is really bad considering the index DUST tracks, NYSE Arca Gold Miners Index, was only down 58% in 2016.
Now that we have the gold miners out of the way, let's dig into oil and gas. Another Direxion Bear 3X product was the second worst performing ETF of 2016 as it lost 96.92%. Direxion Daily S&P Oil & Gas Exploration and Production Bear 3X Shares ETF (PACF:DRIP) provides three-time inverse exposure to an equal-weighted index of the largest oil and gas exploration and production companies in the US. The ETF carriers and an expense ratio of 0.96% and as of its last reporting only had $35 million in assets. DRIP has only been around since May of 2015 and if things continue as they have may not make it to its second birthday.
If oil prices continue to rise, as OPEC and others would have you believe, DRIP will continue to struggle. But, if OPEC members cheat on their production quotas, as we have seen them do in the past, the price of oil could again fall, meaning DRIP will rise. Furthermore, when the price of oil gets to a certain level, high production cost producers will re-enter the market, which could then again bring the price of oil down. Personally, I don’t trust OPEC members not to cheat and with oil rig counts currently sitting at their highest level over the past year, I have a hard time believing the price of oil will continue to climb. But having said that I still wouldn’t buy DRIP, mainly because of the daily rebalancing and high expense ratio.
The fourth worst performing ETF of 2016 was the ProShares Ultra VIX Short-Term Future ETF (PACF:UVXY) which fell 94.09% in 2016. This ETF gives investors two times leveraged exposure to an index comprising first and second-month VIX futures positions with a weighted average maturity of one month. This ETF is designed to capture the volatility of the S&P 500 on a daily basis. Like the other ETF's on this list UVXY rebalances daily and is not intended to be held for long periods of time. The rebalancing caused UVXY to decline by 94% during the year compared to the 68% the index UVXY follows.
UVXY also trades on huge daily volume, indicating investors who traded UVXY usually don’t have very long holding periods. The ETF only has $508 million in assets under management but has more than $449 million in average daily trading volume. Furthermore the fund's expense ratio is 1.32%.
One lesson that we should learn from 2016's Top ETF Losers is that leveraged products certainly don’t pay if you're on the wrong side of the trade and especially over the long-term. Two of the top three Top ETF winners of 2016 were all 3X leveraged Bull products, but unless your crystal ball is always spot on, I would certainly stay away from these products when it comes to long-term investing. On a day-to-day basis, you can perhaps make some money, but at that point you are really just gambling.
Furthermore, if we compare the two lists, you can see there was not much carry-over. The top performing ETF's were financials and semiconductors while the worst performers were gold miners and oil and gas. That should also tell us that just because we think an industry will do well or poorly, doesn’t mean we will make the greatest return by betting the inverse of what we believe will happen.
Check back soon for 1 ETF to Buy, 1 to Sell, and 1 to Hold in 2017.
Disclosure: This contributor did not own shares of any company or security mentioned above 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.