According to a recent report issued by Carey Research, buyers need to be wary when buying some exchange traded funds (ETFs) since the name used for the fund can be misleading. According to its author, senior analyst Vedran Vuk, the fine print may reveal that the fund is not what the name of the fund would suggest.
According to Vuk, a fund name may have absolutely nothing to do with its contents and his report identifies the top 10 most misleading ETFs names and his reasoning.
1-HDG- ProShares Hedge Replication: Doesn’t actually hold any hedge funds but attempts to replicate the Merrill Lynch Factor Model Exchange Series, which tries to correlate with the HFRI Fund Weighted Composite Index an index of 2,000 hedge funds. Currently HDG has 82% of its assets in three-month treasury bills.
2-GDXJ-Market Vectors Junior Gold Miners: Doesn’t hold any “junior” mining companies. The top ten holdings are companies with market caps in excess of a billion each. Vuk concludes that “GDXJ was a flawed idea from the very start”.
3-USO-United States Oil Fund: “Originally designed to follow WTI crude oil prices, USO is perhaps the king of misleading ETFs”. While designed to follow crude prices, it can actually go in the opposite direction which is what happened in 2009 when oil rose and USO remained flat. This is due to the fact that rather than a bet on the price of oil, it a bet on the “shape of the crude-oil forward curve”.
4-UNG-US Natural Gas Fund: UNG has problems similar to USO in that its value remained flat and actually declined from April 2009 onward while natural gas prices rose.
5-GLD-SPDR Gold Shares: Many investors believe GLD securely protects their gold and they can retrieve it upon request. Actually it can only be redeemed at a minimum of 10,000 ounces, which is about $16-$17 million depending on the then current price of gold. This feature is of little importance to the average investor. Furthermore the prospectus includes an option to redeem gold requests in cash rather than metal. Since GLD is structured as a grantor trust, investors pay taxes on the underlying asset, gold, which is taxed at 28% (since it is considered a collectible) instead of the usual 15% rate.
6-BABZ-PIMCO Build America Bond Strategy Fund: While the name suggests nationwide govenrment bond subsidies with a diversified portfolio of bonds based on infrastructure projects, Vuk points out that a better name for its strategy would be “long maturities and troubled states”. Average maturities are 27.6 years and allocations of nearly 70% of the underlying investment are in problem states of California, New York, Illinois and New Jersey.
7-ESR-iShares MSCI Emerging Markets Eastern Europe Index Fund: This should really be called a Russian ETF since 76% of the allocation goes there with the balance to Poland, Czech Republic and Hungary.
8-EPP, VPL & PAF- iShares MSCI Pacific ex-Japan, Vanguard MSCI Pacific ETF and PowerShares FTSE RAFI Asia Pacific ex-Japan: All three have the same problem: a better name would have been Asia-Pacific Fund Ex-Most Countries in Asia Pacific since they concentrate on Australia and don’t capture the geographic area in their descriptions.
9-FLTR-Market Vectors Investment Grade Floating Rate ETF: Vuk would rename this ” Investment Grade Floating Rate Financials Fund” since over 91% of the allocation is in financials. He points out: “FLTR owners are holding a big, steaming bag of bank bonds freshly scraped from the 2008 sidewalk. ….If the financial industry goes, then so does this fund.”
10-FDGFX-Fidelity Dividend Growth Fund: Technically not an ETF, Vuk included this on his list its name suggests it might be. It yields .47% dividend with an expense ratio of .93%. The low yield is no suprise since its top ten holdings included Apple, Citigroup, CVS Caremark, none of which pays any significant dividend.
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