Exchange traded funds have surged in popularity over the last decade, and for good reason. A low cost, broadly diversified fund that tracks a stock index like the S&P/TSX 60 or S&P 500 doesn’t need to pay an expensive management and research team to deliver its mandate – saving you money.
But a disturbing trend in the ETF space is the growing number of niche products and exotic strategies that seem to go against the very idea of passive investing.
There are funds that track specific commodities like oil and natural gas, funds whose primary purpose is to short specific stocks or sectors, and leveraged funds that hedge one asset class against another.
Invest like a billionaire
One ETF that got a lot of press when it came to market last month was the Direxion iBillionaire Index ETF. This fund tracks something called the iBillionaire Index, which is made up of 30 large-cap U.S. stocks in which investment billionaires like Warren Buffett own a large position.
Top holdings include technology companies like Apple, Google, and Microsoft, as well as firms like Halliburton, CitiGroup, and FedEx.
Related: Stock market bubbles
I get it – who wouldn’t want to invest like a billionaire? I was curious so I looked into the iBillionaire fund to see what it was all about.
A management expense ratio of 0.65% looked enticing. But one caveat in the funds’ prospectus notes that the fee is being partially subsidized by Direxion’s advisory firm and by September 1, 2015 the fee jumps up to 1.08%.
I’d never heard of Direxion so I decided to check out the company and its other funds. I was shocked by what I found:
Triple leveraged shares, both long and short. Currency funds, futures and commodities funds, and what appears to be an investment in Russian circus bears.
So is it possible that the seemingly reasonable iBillionaire fund is just a ploy to lure unsuspecting investors into this mess of leveraged bull and bear funds?
The Daily Russia Bull triple leveraged shares (RUSL) have returned a whopping -47.73% since inception in 2011.
Okay, so that must mean the Daily Russia Bear triple leveraged shares must have done well, right?
Not quite. Since inception in 2011, this bizarre Direxion fund has posted returns of -29.14%
There’s simply no place in an investors’ portfolio for these highly exotic and dangerous ETFs. Companies like Direxion open and close funds so often that it’s difficult to judge its performance due to survivorship bias.
Earlier this month, the fund company announced the closure of five ETFs due to the inability to attract sufficient investment assets. Thankfully, many investors did not feel that an investment in triple leveraged short positions in Brazil, Europe, Japan, or South Korea would be wise.
Billionaires and hedge funds be damned. If you really want to invest like a billionaire then take Warren Buffett’s advice and stick to a plain vanilla low cost ETF that tracks a broad market index like the S&P 500.