The Ten Worst ETFs of 2009

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Michael Johnston submits:

For most investors, 2009 has been a very good year, with a surge in liquidity leading almost all asset classes to big gains. As many national economies emerged from recession, investors regained their appetite for risk, sending emerging markets funds through the roof (these funds dominated the list of the Top Ten Performing Equity ETFs ). But less risky asset classes also jumped in 2009, and the vast majority of exchange-traded products are heading towards the finish line well in the black on the year.

But some funds have not been nearly so fortunate. Although this year has been one of the best in recent memory for most investors, several ETFs missed out on the surge and instead posted big losses. Beyond inverse and leveraged ETFs, the ten worst performing ETFs of 2009 include:

10. PowerShares 1-30 Treasury Ladder ( PLW )

As risk tolerance has returned to the markets this year, many safe havens that performed relatively well in 2008 have seen declines in value. PLW invests in approximately 30 equally-weighted Treasury issues with various time until maturity, ensuring that it spreads exposure across the yield curve.

Unfortunately for this fund, Treasuries fell out of favor in 2009 as interest rates remained at record low levels and investors looked to tilt portfolios away from low-risk assets. PLW is down 8.5% so far in 2009.

9. iPath Dow Jones-UBS Energy Subindex Total Return ETN ( JJE )

This exchange-traded note is linked to an index composed of futures contracts on four energy-related commodities: crude oil, heating oil, natural gas, and unleaded gasoline. Crude oil prices have surged in 2009, with prices per barrel rising from $35 to more than $70.

But increases in spot prices for several of these commodities have not translated to gains for JJE, as the nuances of a futures-based investment strategy has weighed on the fund. JJE has lost about 14% in 2009, making it one of the biggest disappointments to investors.

8. ELEMENTS MLCX Grains Index Total Return ETN ( GRU )

Most commodity investors elect to achieve exposure to this "fourth asset class" through diversified funds that include exposure to a number of different resources. But there are also a number of commodity products that focus exclusively on one commodity, ranging from sugar to gold to lead.

Most commodity prices have surged in 2009, boosted by a weak dollar and broad economic recoveries. But wheat has been one of the exceptions, and the ELEMENTS MLCX Grains Index Total Return ETN ( GRU ) has lost about 16% in 2009.

7. iPath DJ-UBS Livestock Total Return ETN ( COW )

Livestock has been another weak pocket of the commodities market in 2009. Despite overarching concerns about long-term supply shortages as emerging economies continue to expand, most food prices failed to deliver material returns this year.

The cleverly-named COW, which invests in lean hogs and live cattle, has lost about 20% in 2009. Also among the year's worst performers is the UBS E-TRACS CMCI Livestock Total Return ETN ( UBC ), which is down about 15.8% year-to-date.

6. iPath Global Carbon ETN ( GRN )

Given the focus on climate change regulations that has dominated global headlines in recent weeks, many investors likely would have expected a fund that measures the performance of carbon-related credit plans to be among the year's best performers. But the iPath Global Carbon ETN ( GRN ) is actually among the year's worst, losing -19.7% year-to-date.

The index to which this ETN is linked may expand significantly in coming years as new legislation is introduced, but currently includes two carbon-related credit plans: the European Union Emission Trading Scheme and Kyoto Protocol's Clean Development Mechanism.

5. PowerShares Dynamic Banking ( PJB )

Many ETFs in the Financials Category have surged in 2009 (the broad-based XLF is up more than 15% on the year), beginning to reclaim some of the ground lost during a disastrous 2008. But not all funds in this group have delivered big returns to investors.

The PowerShares Dynamic Banking ( PJB ) has lost almost 22% on the year, as many of the component companies have endured a tumultuous stretch. PJB invests in about 30 individual financial firms, ranging from giants like JP Morgan and Wells Fargo to smaller stocks such as Dime Community Bancshares and Bank of Hawaii.

4. SPDR KWB Regional Banking ETF ( KRE )

This ETF further demonstrates the potholes that exist on the financial sector's long road to recovery. While banking behemoths with multi-national operations have flourished in 2009, many of the smaller players have struggled to find their footing. Regulators have closed at least 140 banks already in 2009, costing the Federal Deposit Insurance Corp. hundreds of millions of dollars. While the pace has slowed considerably, closures have continued to mount in recent weeks, indicating that the financial industry is yet to fully cleanse itself of toxic asset exposure.

KRE has lost about 22.2% in 2009. Also taking it on the chin in 2009 was the iShares Dow Jones U.S. Regional Banks Index Fund ( IAT ), which has lost more than 10%.

3. Vanguard Extended Duration Treasury ETF ( EDV )

Despite the emergence of several "green shoots," it is evident that the current recovery is in a very fragile state. While developed and emerging economies around the world have begun raising interest rates, the U.S. Federal Reserve has indicated on several occasions that rates will remain at record lows for several quarters to come. These developments, along with a general shift out of Treasuries in favor of more risky assets, has weighed on long-term government bond funds.

EDV has lost 31.4% in 2009, while the iShares Barclays 20+ Year Treasury Bond Fund ( TLT ) and SPDR Barclays Capital Long Term Treasury ETF ( TLO ) have shed 19.5% and 9.9%, respectively.

2. United States Natural Gas Fund ( UNG )

One of the most popular ETFs of 2009 has also been one of the worst performers. The United States Natural Gas Fund ( UNG ) has seen cash inflows of more than $5.4 billion this year, and regularly trades more than 30 million shares in a single day. But much of the cash that has flowed into this fund has disappeared, as UNG has lost about 55% so far in 2009 and now has a market capitalization of about $4.7 billion.

UNG's tough year is perhaps the best example of the complexities that accompany many exchange-traded commodity products. The spot price of natural gas has actually increased in 2009, but a fund that invests primarily in near-month futures contracts on the commodity has lost more than half of its value. For a closer look at how contango can erode returns to commodity products, see What's Wrong With UNG?

The iPath DJ-UBS Natural Gas ETN ( GAZ ) hasn't fared much better, declining 52% so far this year.

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

While correlations between most asset classes have strengthened in recent years, there remain some alternative investments that exhibit an inverse relationship with equity markets. Volatility ETNs are a relatively new innovation, introduced after the CBOE Volatility Index (better known as the VIX) surged to all time highs during the chaos of late 2008.

As some degree of normalcy has returned to the markets in 2009, volatility indicators have returned to historical averages, and futures-based investment strategies including these benchmarks have suffered tremendously. Since its inception in late January, VXX has lost more than 65%, earning it the top spot on the list of the year's worst performing ETFs.

Disclosure: No positions at time of writing.

See also On the Merits of a Fixed Income Proxy Fund on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs , Stocks


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