Some newer ETFs as well as some of the larger commodity ETFs deserve more diligence according to the WSJ’s Tom Lauricella.
In the column Far From Vanilla: Some Booming ETFs Need More Scrutiny, Lauricella writes that certain fund pairs that were designed to profit from opposite moves in markets had both either risen or fallen.
For example, ProShares Ultra Real Estate (URE) and ProShares UltraShort Real Estate (SRS) were down 46% and 64% respectively for the six months ended June 30 compared to a negative 12% return for the funds’ benchmark index. The problem lies in the design of the funds which are built to deliver against a daily target. The effects of compounding can cause the leveraged funds to go off track if held longer than one day.
Lauricella also warns that some ETFs may be too big relative to the size of their respective markets. Case in point, the United States Natural Gas Fund (UNG) which earlier this year held the equivalent of 20% of all natural-gas futures contracts.