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Expert Warns of Value Traps for ETFs, ETNs

Exchange traded funds offer an easy way to get into certain investments, but one expert said it could also be a portfolio bomb.

High demand for ETFs — and exchange traded notes — can create a divergence from underlying assets, which is something for investors to watch for, Tom Lydon of ETFtrends.com said Tuesday on “Fast Money.”

Lydon selected a few names priced at a premium, in which an ETF’s share price is greater than the value of its underlying assets.

The were:

  • Dow Jones-UBS Natural Gas Subindex ETN, trading at a 56.4 percent premium
  • Columbia Intermediate Municipal Bond, trading at a 14.3 percent premium
  • Market Vectors China, trading at a 6.5 percent
  • Platinum, trading at a 26.6 premium

One ETN, Lydon pointed out, traded at a 15.9 percent discount from its underlying assets’ value: Credit Suisse Global Warming Index.

“More than ever, it’s important to do your homework,” he said. “Just because ETFs are easy to invest in and you’re able to access markets that five years ago the average investors didn’t have easy access to, it doesn’t mean just jump in when you see an opportunity.”

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Trader disclosure: On March 27, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders: Tim Seymour is long AAPL; Tim Seymour is long BAC; Tim Seymour is long INTC; Tim Seymour is long CSCO; Tim Seymour is long FCX; Dan Nathan is long AAPL JAN 13 450/400/350 PUTS; Dan Nathan is long BAC MAY 7/5 PUTS; Dan Nathan is long INTC; Dan Nathan is long IBM; Dan Nathan is long WMT APR 60/57.5 PUT SPREAD; Dan Nathan is long RIMM MARCH/MAY 15 PUT SPREAD; Dan Nathan is long IBM APRIL 205/200 PUT SPREAD; Dan Nathan is long SPY MARCH 130/R5 PUT SPREAD; Dan Nathan is long QQQ MARCH 66.64 PUT SPREAD; Dan Nathan is long XLK APR 29 PUTS;

For Tom Lydon
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