Lose 25% of your funds in one year / oil / carrying costs ..........................................
Okay -- we finally have some indication of just how much money these IDIOTS who go "long only" commodities (and continuously lose the carrying costs that exist now in many different commodities futures markets) ...
lose.
The following WSJ article slips in the details on some ETF that goes "long only" crude oil.
(See bold print below).
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April 19, 2007
Why Hot Funds Are Tripping Up Some Investors
ETFs, Which Are Meant To Track Benchmarks, Increasingly Go Astray
By DIYA GULLAPALLI
Fresh troubles are emerging in a number of exchange-traded funds, shedding light on the ways the increasingly popular investment tools can trip up investors.
ETFs, which are essentially mutual funds that trade on exchanges like shares of stock, were designed to match the performances of various market benchmarks, such as the Standard & Poor's 500-stock index. They still occupy a relatively small corner of the investment universe, but they have blossomed in the past few years, thanks to their low fees and tax advantages, attracting an increasing number of individual investors.
In recent months, however, some ETFs have begun diverging widely from the performance of the benchmarks they are supposed to follow. At the same time, several newer ETFs with short track records are failing to match the hypothetical rates of return they would have achieved in previous years if they had existed then.
Victoria Bay Asset Management's U.S. Oil Fund, one of the fastest-growing ETFs of the past year, has fallen more than 15 percentage points behind the oil price it was designed to track. In another case, a Claymore Securities ETF structured to track oil saw its share price fall when oil prices rose -- and vice versa -- the opposite of what was intended. That kind of divergence can hurt shareholder returns.
Though the exact reason for the disparity isn't clear, the performance of these oil-related funds has been hurt by the run-up in oil futures, which has increased the sums they need to shell out each month to roll over their futures contracts.
Greg Drake, a Claymore Securities executive, says occurrences like these are expected occasionally in the funds, though "it's not what we desire."
An official at Alameda, Calif.-based Victoria Bay declined to comment.
Such issues are arising in only a small number of ETFs, but they may mark a crucial shift in an investment sector long known for its predictable performance. At a time when ETFs are establishing themselves as a staple in Americans' portfolios, investors may need to consider that some new funds are coming to market with new risks and the potential to deliver unexpected results.
In less than three years, assets under management in ETFs have roughly doubled to more than $450 billion. About 110 new ETFs have been launched so far this year, gaining quickly on the total of about 150 launched for all of last year. By contrast, only about 50 distinct new conventional mutual funds have launched in 2007.
Hoping to capture more investor money, ETF providers are creating funds that slice up the market in increasingly narrow and unusual ways. IndexIQ Inc., Rye Brook, N.Y., recently filed with regulators to launch a family of 20 ETFs aimed at individual investors, including the IndexIQ Customer Loyalty Leaders Large Cap Fund, which would track companies with strong customer loyalty.
Adam Patti, chief executive of IndexIQ, says that intangible assets such as consumer loyalty can add substantial value to a company. "These products are not specialized, but fully diversified" across different company sizes and investing styles, he says.
Along with their lower costs and tax advantages over regular mutual funds, ETFs owe much of their popularity to the fact that they offer more frequent updates of their holdings and are easier to buy and sell because they trade all day in public markets. Some of the newer products, however, are straying from these advantages.
One recurring problem: Some newer ETFs are diverging from their hypothetical rates of return. The indexes on which ETFs are based are routinely "back tested" to see how they would have performed in previous years. That back-tested data is then often used to market the funds to investors.
Back-tested data for the WisdomTree High-Yielding Equity Index shows average annual returns outperforming the Russell 1000 Value Index for several time periods, including by more than three percentage points for the 10-year period ending in March. However, from June 2006 through the end of March, the ETF based on the WisdomTree Index trailed the Russell 1000 Value Index by more than 0.50 percentage point.
Other ETFs issued by New York-based WisdomTree Investments and PowerShares Capital Management of Wheaton, Ill., have fallen behind their back-tested data in similar ways.
Sixteen of the 20 ETFs launched by WisdomTree last June were outperforming their benchmarks as of the end of last month. "WisdomTree was happy with that performance," says Luciano Siracusano, the firm's director of research. He adds that "short time periods are not indicative of longer market cycles." The company's Web site states that "no representation is being made that any investment will achieve performance similar to those shown." PowerShares offers similar disclaimers.
ETF advocates say new funds like these are an important investment tool because they often give small investors access to markets or strategies that traditionally have been tricky to invest in, ranging from gold, oil and other commodities to international real estate. That's partly why Victoria Bay's U.S. Oil Fund ranks among the most successful new ETFs, amassing more than $900 million in assets since its inception last April.
["successful" for WHO ???]
The oil fund is designed to track the movements of light, sweet crude oil, a type of investment generally considered too cumbersome and complex for most individual investors. The fund's portfolio includes crude-oil futures contracts and other oil-related securities. However, since its inception, shares of the fund have declined more than 25%, while the oil price it is supposed to follow has fallen just 10%.
[Don't forget that it is just "great, great, great" to be long commodities. Calpers (the other day) proudly announced that they have plowed another roughly $500 million into this strategy.]
Victory Bay portfolio manager John Hyland points to regulatory filings about the product that explain such potential discrepancies in returns. Among other issues, the filings state that because the fund invests in a broad array of sophisticated futures contracts and other instruments, it can stray from its benchmark.
Two oil-related funds from Claymore, based in Lisle, Ill., have seen particularly striking discrepancies. The two funds -- the Claymore MACROshares Oil Up Tradeable Shares and Claymore MACROshares Oil Down Tradeable Shares -- let investors bet on oil prices rising or falling, respectively. But in recent months, their shares have sometimes moved in reverse of what they're supposed to. One day earlier this month when the relevant price of oil increased seven cents a barrel, the "Up" ETF's price dropped 25 cents.
The two funds' shares also frequently close at big premiums or discounts to the value of their underlying holdings. On some days this month, for instance, shares in the "Up" fund were priced more than 8% above the value of its assets. The "Down" shares traded more than 9% below their asset value.
These discrepancies highlight how tough it can be to design ETFs and related products like these for narrow or esoteric investments. "You never know what to expect with a new product," says Claymore's Mr. Drake. Overall, he says, the funds' underlying value has done "a fabulous job, compared to the alternatives, in tracking the price of oil."
Another emerging issue relates to taxes. Holders of ETFs generally have been able to avoid the capital-gains taxes that often plague investors in conventional mutual funds. That's because a conventional mutual fund often has to sell some of its holdings when investors want to leave the fund; if those holdings have increased in value since they were purchased, it may have a capital gain. By contrast, ETF shares change hands in the market; the underlying securities don't have to be sold off when an investor wants to sell out.
These days, however, more ETFs are making capital-gains distributions. About 6% of ETFs paid out capital gains to investors last year, compared with 3% in 2005, according to fund researcher Morningstar Inc. Among them was ProShares Ultra QQQ, which paid holders the equivalent of about 6% of its share price in gains last year, and the ProShares Ultra S&P500, which paid about 4%. The two funds seek to double the daily returns of the Nasdaq 100 Index and the S&P 500, respectively. To do that they buy not only the stocks in those indexes, but also futures and other derivatives, seeking to magnify their returns.
ProShares says the two ETFs could be "less tax efficient than plain-vanilla ETFs" due to their investment strategy.
Write to Diya Gullapalli at diya.gullapalli@wsj.com
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