Herb Greenberg's 8 Weirdest ETFs

Greenberg's 8 Weirdest ETFs

Herb-Greenberg_weird-etfs-cover3.jpg
Sometimes you wonder what they were thinking when they came up with some of these ETFS. Some are just plain weird. Others are wrongheaded. Others just don’t make sense or are faddish, like the Global X Fishing ETF, launched in May of 2011 to invest in the fishing industry — only to be shut last February after it failed to swim. Ditto for the Global X Farming ETF and the Food ETFs, both equally short-lived. Many are created as a “product” for the purpose of cashing in on the latest and greatest,
Photo: CNBC

Sometimes you wonder what they were thinking when they came up with some of these ETFs.

Some are just plain weird. Others are wrongheaded. Others just don’t make sense or are faddish, like the Global X Fishing ETF, launched in May 2011 to invest in the fishing industry — only to be shut last February after it failed to swim. Ditto for the Global X Farming ETF and the Food ETFs, both equally short-lived.

Many are created as a “product” for the purpose of cashing in on the latest and greatest, like the CurrencyShares Russian Ruble Trust (shut down) and the Guggenheim Ocean Tomo Patent ETF (also closed.) Sometimes they work, sometimes they don’t.

I might as well start the “Throwing spaghetti at the wall to see what sticks” ETF. Which are the weirdest? With the help of Index Universe, I chose a bunch. Click ahead for the list.

By Herb Greenberg
Posted 27 June 2012

8. iPath DJ-UBS Natural Gas TR ETN (GAZ)

Herb-Greenberg_weird-etfs-natGas.jpg
Over the years I think I’ve gotten more complaints about this fund than others. According to Index Universe: “GAZ is one of two exchange-traded products that provide exposure to front-month natural gas futures. One, the United States Natural Gas ETF (UNG), is a perfect ETF, doing exactly what it claims it will do. GAZ, on the other hand, stopped creating new shares about two years ago. As a result, it now trades at a massive and artificial premium to fair value: At the close of trading today, it
Photo: Getty Images | CNBC Composite

Over the years I think I’ve gotten more complaints about this fund than others. According to Index Universe, an ETF analysis firm: “GAZ is one of two exchange-traded products that provide exposure to front-month natural gas futures. One, the United States Natural Gas ETF (UNG), is a perfect ETF, doing exactly what it claims it will do. GAZ, on the other hand, stopped creating new shares about two years ago. As a result, it now trades at a massive and artificial premium to fair value: At the close of trading today (June 18, 2012), it was trading at a 44% premium to its fair value. Our question: Why does anyone in their right mind buy a product trading at a 44% premium, which could disappear at a moment’s notice?” Good question. Weird.

Barclays Capital, which issues iPath funds, declined comment.

7. iPath S&P 500 VIX Short-Term Futures ETN (VXX)

Herb-Greenberg_weird-etfs-iPath.jpg
Tracking the S&P 500 VIX Short-Term Total Futures Return Index, which is an indicator of market volatility, the VXX “is hugely popular, says Index Universe, “but you have to ask yourself, why? VXX is an exchange-traded note, whose issuing bank (Barclay’s Capital) promises to provide you exposure to futures, which themselves are linked to an uninvestable index that measures the future volatility of the S&P 500 based on how the options market is trading.In other words, it’s a credit instrument bas
Photo: Getty Images | CNBC Composite

Tracking the S&P 500 VIX Short-Term Total Futures Return Index, which is an indicator of market volatility, the VXX “is hugely popular, says Index Universe, “but you have to ask yourself, why? VXX is an exchange-traded note, whose issuing bank (Barclay’s Capital) promises to provide you exposure to futures, which themselves are linked to an uninvestable index that measures the future volatility of the S&P 500 based on how the options market is trading.

In other words, it’s a credit instrument based on the price of futures tied to an index that measures future volatility based on ANOTHER derivative. Did we mention that (as of June 18), it’s down 96% from its highs, and that the current shape of the volatility futures curve suggests it will lose about 14% per month due to its negative roll yield?” Right, weird.

Again - Barclays Capital declined comment. (Given that they wouldn’t comment on the GAZ — Not so weird.)

6. Russell 1000 High Volatility ETF (HVOL)

Herb-Greenberg_weird-etfs-russel.jpg
We all want low volatility, but the “HVOL flips things on their head, owning up to 200 of the most volatile stocks in the Russell 1000,” says Index Universe. “That seems odd on the face of it: We don’t hear from a lot of investors wanting to dial UP their volatility. But what caught our eye was this: HVOL has traded 2,500 shares in the past three months. That trade took place May 31: The other 60 days, not a single share traded (as far as we can tell).” A Russell official said that while “Produc
Photo: Getty Images | CNBC Composite

We all want low volatility, but the “HVOL flips things on their head, owning up to 200 of the most volatile stocks in the Russell 1000,” says Index Universe. “That seems odd on the face of it: We don’t hear from a lot of investors wanting to dial UP their volatility. But what caught our eye was this: HVOL has traded 2,500 shares in the past three months. That trade took place May 31: The other 60 days, not a single share traded (as far as we can tell).”

A Russell official said that while “Products such as HVOL may be less intuitive, ... high volatility stocks tend to have high stock-specific risk and often a contrarian nature, as seen in HVOL’s 24 percent exposure to the Financial Services sector currently. High Volatility stocks may represent more of a tactical exposure, but they can and do outperform at times — such as Q1 2012 when HVOL outperformed its parent Russell 1000 Index by nearly 5 percent. The High Volatility ETFs could also be used as potential short positions as a way to help hedge volatility exposure or in combination with the Low Volatility ETFs in a long/short structure.”

5. Fidelity Nasdaq Composite Index Tracking ETF (ONEQ)

Herb-Greenberg_weird-etfs-fidelity.jpg
It almost doesn’t get weirder than this. Index Universe: “Fidelity – one of the largest fund providers in the world – broke into the ETF space in 2003 with its first ETF, ONEQ… and then did absolutely nothing for most of a decade. That’s weird. Investors have done nothing with it either: ONEQ has seen zero inflows and zero outflows since May 17th, 2010, making it one of the most stagnant exchange-traded products in the world. Fidelity is now planning a bigger push into ETFs, but ONEQ stands alon
Photo: Getty Images | CNBC Composite

It almost doesn’t get weirder than this. Index Universe: “Fidelity – one of the largest fund providers in the world — broke into the ETF space in 2003 with its first ETF, ONEQ … and then did absolutely nothing for most of a decade. That’s weird. Investors have done nothing with it either: ONEQ has seen zero inflows and zero outflows since May 17th, 2010, making it one of the most stagnant exchange-traded products in the world. Fidelity is now planning a bigger push into ETFs, but ONEQ stands alone as an odd bird.”

Indeed it does, but Fidelity said it’s just one of more than 1,400 exchange-traded products “we make available to our customers."

4. Claymore CEF Goldman Sachs Connect ETN (GCE)

Herb-Greenberg_weird-etfs-Claymore.jpg
This ETF is also referred to as the G-C-E. Just how weird is it? According to Index Universe: “Claymore’s CEF GS Connect ETN is a platypus pregnant with a dinosaur in the world of bizarre exchange-traded products. It is an ETF that exclusively holds closed-end funds. Most ETF investors hate closed-end funds, since they expose investors to premiums and discounts. Wrapping them in an ETF does nothing to avoid that flaw. Add in the fact that it’s an ETN and … well… you have an unusual package.” A s
Photo: Gary Lewis | Photolibrary | Getty Images

This ETF is also referred to as the G-C-E. Just how weird is it? According to Index Universe: “Claymore’s CEF GS Connect ETN is a platypus pregnant with a dinosaur in the world of bizarre exchange-traded products. It is an ETF that exclusively holds closed-end funds. Most ETF investors hate closed-end funds, since they expose investors to premiums and discounts. Wrapping them in an ETF does nothing to avoid that flaw. Add in the fact that it’s an ETN and … well … you have an unusual package.”

A spokeswoman for Guggenheim Investments, which oversees the Claymore fund, said, “We do a very robust business in Unit Investment Trusts of closed end funds, and have for a long time. These portfolios offer efficient access to a basket of closed end funds that track similar investment objectives. In the case of GCE, the product is designed to cover the most attractive segment of the taxable closed end fund universe as represented by their discounts and distribution rates. Therefore, there’s not a lot of exposure to CEFs trading at premiums.”

3. QuantShares U.S. Market Neutral Anti-Momentum Fund (NOMO)

Herb-Greenberg_weird-etfs-QuantShares.jpg
The name may be easy for you to say, but — what does it even mean? “The Boston-Based QuantShares picked a ticker (NOMO) that would make Red Sox fans smile, and a name that sounds like the kryptonite of investing: Market Neutral Anti-Momentum,” says Index Universe, an ETF analysis firm. “Who wouldn’t want to put their money into that? It’s actually an interesting little fund pairing long positions in low momentum stocks with short positions in high momentum stocks, but the hedge fund-in-a-box may
Photo: Getty Images | CNBC Composite

The name may be easy for you to say, but — what does it even mean?

“The Boston-based QuantShares picked a ticker (NOMO) that would make Red Sox fans smile, and a name that sounds like the kryptonite of investing: Market Neutral Anti-Momentum,” says Index Universe. “Who wouldn’t want to put their money into that? It’s actually an interesting little fund pairing long positions in low momentum stocks with short positions in high momentum stocks, but the hedge fund-in-a-box may be more sophisticated than the ETF market is ready for.”

To be sure, QuantShares Chief Investment Officer Chuck Martin explained that the fund is designed for use as a hedging instrument for institutional momentum investors.

2. ELEMENTS/Credit Suisse Global Warming ETN (GWO)

Herb-Greenberg_weird-etfs-Credit-Suisse.jpg
When I heard about this my “Oh, please!” The fund is supposed to invest in companies that have an increased focus on products or services tied to combat global warming. Never mind that the fund has turned in a cold performance. According to Index Universe, which helped on this project: “Technically, Credit Suisse is on the hook for the returns here, which are tied to the Credit Suisse Global Warming index. Good luck figuring out what that means though, the Elements website hasn’t had holdings in
Photo: Getty Images | CNBC Composite

When I heard about this, my reaction was: “Oh, please!”

The fund is supposed to invest in companies that have an increased focus on products or services tied to combat global warming.

Never mind that the fund has turned in a cold performance. According to Index Universe: “Technically, Credit Suisse is on the hook for the returns here, which are tied to the Credit Suisse Global Warming index. Good luck figuring out what that means though, the Elements website hasn’t had holdings in years, the index is closed on Bloomberg unless you pay CS for a license, and there’s nothing on CS’s website beyond a two-year old fact sheet with, you guessed it, no holdings. It’s one of the great black holes of investing.”

I called Credit Suisse trying to get comment. I was referred to Elements, but the emails I sent using the address on Elements’ website bounced back, and the people who answered the phone had no idea what I was talking about and couldn’t refer me further. (Really weird.)

1. (Tied) The Global X Guru Holdings Index Fund (GURU) / AlphaClone Alternative Alpha ETF (ALFA)

Herb-Greenberg_weird-etfs-globalX-guru.jpg
Tie for No. 1 goes to the The Global X Guru Holdings Index Fund and the AlphaClone Alternative Alpha ETF. While these new funds may sound brilliant in concept, they’re simply wrongheaded. They attempt to give the the little guy a taste of the holdings in hedge funds, gleaned off their 13-F SEC filings or some proprietary stock-picking method. Just one problem: Piggybacking on trades by others, by its nature, is a dangerous concept because the ETF will only know 45 days after the fact when the fu
Photo: Getty Images | CNBC Composite

Tie for No. 1 goes to the The Global X Guru Holdings Index Fund and the AlphaClone Alternative Alpha ETF. While these new funds may sound brilliant in concept, they’re simply wrongheaded. They attempt to give the little guy a taste of the holdings in hedge funds, gleaned off their 13-F SEC filings or some proprietary stock-picking method. Just one problem: Piggybacking on trades by others, by its nature, is a dangerous concept because the ETF will only know 45 days after the fact when the funds they’re watching bought and sold. Not weird, perhaps, but definitely off the scale in just plain silly.

As you might guess, Global X CEO Bruno del Ama and AlphaClone founder Maz Jadallah don’t agree. “The methodology of the index automatically filters out high turnover managers, leaving only managers that tend to have longer term holdings where the exact day in which a security is bought or sold has less of an impact,” del Ama says. “The index also includes the largest holding of each selected manager, which is indicative of a high conviction idea that is often bought and sold over a longer period of time.”

And Jadallah, whose company was founded as a 13-F research service, says that “hedge fund holding periods, despite the popular perception of being short term in nature, are actually about a year on average and usually much longer for their largest positions. The key to success in ALFA’s strategy is manager selection — there are a lot of hedge fund managers but only a subset provide persistent alpha-generation by cloning their reported holdings.”