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.

Related: The beginner’s guide on how NOT to start 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:

Invest like a billionaire?

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?

Related: Is it time to say goodbye to dividend investing?

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%

Final thoughts

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.

Related: Why investors should embrace simple solutions

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.

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14 Comments

  1. Rick Manjin on September 12, 2014 at 2:18 am

    My uncle suffered some pretty bad losses in 2007 to 2008. He just is barely above with a 5% gain last week. He sold all his stocks, mutual funds and does not want to take any principal risk anymore.

    This setback will mean 6 more years of working full time for him.

    He is now very conservative and all he does is put all his $500,000 in investments in multiple financial institutions in 5 year GIC’s, TFSA’s, RRSP’s at 3.00%.

    He is debt, mortgage free and owns his own house. He saves to catchup now putting $4,000 a month a side and has a $50,000 cash reserve, 2.00% cashable GIC’s.

    He will have $1,600 C.P.P., OAS pension and a $500 monthly inflation indexed life annuity as well in 3 years.

    In one regard he is fortunate that his father passed away 8 years ago and left him a free and clear, all paid for rental property that is bringing in net rent of $800 a month. This property has increased in value by $160,000 worth $445,000 now.

    He is at a point in his life that he wants to sleep at night and make life simpler, less troublesome.

    He may sell the rental property because he can clear $400,000 after all expenses, closing costs, H.S.T, real estate commission, lawyer fees etc. and with 3.00% GIC’s that can bring in $12,000 interest a year.

    This interest is more than $9,600 a year of rental income but will rise annually plus the house can appreciate 2% to 3% yearly as well.

    The problem is if he will be able to continue being a landlord with all the problems with that.

    Then again, if GIC rates rise to 4.00%, this will bring in $16,000 a year in interest income.

    • Thomas on September 12, 2014 at 9:30 am

      I have done the same as your uncle with the exception that I did keep one stock which I have held for over 20 years. I own my home and am debt free. Got out of mutual funds in 2008 after heavy losses that I never recovered from. I bought the funds on the advice of the financial advisor at the bank I had dealt with for 40 years. The blind leading the blind. It was a learning experience.

      • Rick Manjin on September 12, 2014 at 4:07 pm

        I don’t know your particular situation but it sounds you are pretty conservative as well.

        I read and heard many different financial people say don’t have more than 4% in one individual stock and some say up to 10% in individual stock if you don’t have much in stocks, equities, mutual funds etc.

        I think it is good advice if most of your money is in GIC’s, government bonds that are 10 year terms or less etc. and have annuities, pension income in the thousands say $1,500 to $2,500 a month for example.

    • Bernie on September 12, 2014 at 9:35 am

      Rick Manjin,

      Your father would likely have slept well at night all along had he invested for income growth rather than for capital gain. There is far less risk and volatility in investing for dividend growth than investing for principal growth.

      About 80% of dividend growth stocks grew or maintained their dividends through the 2008-2009 recession. Dividend stalwarts like the Canadian “big five” banks have paid dividends for between 150-200 years. Three of the five (BNS, TD & CM) have never had a dividend decrease. The other two (RY & BMO) maintained or grew dividends every year other than minor cuts in 1942-43).

      I’m not trying to change your father’s investing philosophy as everyone’s comfort level is different. I’m just saying there are other conservative alternatives out there in the investing universe.

      Personally I’m retired and have about 2% of my portfolio in fixed income investments. I consider my company pension, CPP & OAS (next year) to be fixed income content. I sleep well with my dividend growth focus. My comfort level would be changed drastically if I were invested in GICs which have trouble keeping up with inflation…but that’s just me!

      • Robert on September 12, 2014 at 10:23 am

        I have a lot in common with you, but am a bit younger. I hate the inflation risk of fixed income investments. No company pension and still debating when to grab CPP.

        • Bernie on September 12, 2014 at 11:04 am

          Robert,

          Again, everyone is different but I chose to take CPP at 61 when I retired. I essentially have OAS in the form of a bridge given with my company pension until OAS kicks in at 65. I haven’t tapped into my RRSP, TFSA or non-registered account yet and don’t expect to for at least 5 years. The way I look at it is I’ll take the gov’t benefits as soon as I can & let my investments grow for a while yet.

      • Rick Manjin on September 12, 2014 at 4:24 pm

        I agree with you to a certain degree. I told my uncle that 25% of all his investments in an index or group of say the top best performing Canadian dividend companies like banks, utilities, railroads, transportation, energy, pipelines, telecoms, insurance etc. would help him grow his income and assets that would protect him from higher inflation.

        This is why my uncle said he is working and saving aggressively for another 6 years because all the compound interest and RRSP, TFSA tax deferring, tax free interest will add up to a pretty decent some.

        He already has indexed C.P.P, OAS and lifetime annuity income and no debts of any type.

        He will still be able to accumulate with interest and savings of about $2,500 a month and not touch any of his principal, investments.

        Inflation will not really have a big impact in his lifetime maybe 20 years from now. This is based on his numbers and investments, financial situation.

  2. BetCrooks on September 12, 2014 at 6:17 am

    The problem with a fund that copies Buffett et all is that it is buying the same stocks long AFTER they invested in them. Warren Buffett didn’t buy into Suncor etc when it was at an all time high. He bought when it was low. Anyone who came along and copied him in, say, June this year bought high!

    But yes, Exchange Traded Funds are not any different than mutual funds in some ways. They offer a zillion different choices to investors and there is no rule that says their fees are lower, either. There are ETFs out there with 3.4% MERs. Buyer beware!

    • Robert on September 12, 2014 at 7:26 am

      This Buffet thing is the problem I have with funds advertising in general. They emphasize past results, which may actually mean a run is now out of steam. (the waiver that future performance cannot be projected based on past performance is never highlighted)

  3. Gary on September 12, 2014 at 7:58 am

    thanks for the info robb. i’m glad someone is keeping an eye on theses shysters!

  4. Dan @ Our Big Fat Wallet on September 12, 2014 at 8:24 am

    I didn’t know an ETF could be that bizarre. It’s ironic because Warren Buffet has openly said that beginner investors should focus on a low cost market index fund. And then leave it. For a long time. Boring but effective

  5. Stephen @ HowToSaveMoney.ca on September 12, 2014 at 8:10 pm

    For a while there when I was new to DIY investing I did actually buy into a leveraged ETF. It was HXU. I actually didn’t lose a ton of money with it as I wasn’t doing a buy and hold (which is always a losing proposition). I was trying to time the market (also a bad idea) … but I made some half decent guesses before I realized I had no idea what I was doing and stopped doing it.

    Glad that realization came to me before I lost big. This was right during the wild swings of 2008 too!

  6. Steve on September 12, 2014 at 9:16 pm

    I knew there were some strange ETF index funds, but this one is pretty funny!

    It’s best for most investors to just stick with a broad based index fund covering the largest share of a market as possible, Like VTI/VUN for the American market!

  7. Laurence White on January 7, 2015 at 12:44 pm

    Direxion 3x leveraged ETFs are for trading, not investing. As stated on their website, they are for “sophisticated traders”, who know what they are doing. They are not “buy-and-hold” products. The amplified move in some of them can be spectacular. Its not rare to see NUGT and DUST (3x Gold Miners) move +15% or -15% daily. If you guess the “direction” right, you can make in a few days what many do in one year. Sounds easy, but the volatility is too much for most people.

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