Exchange-traded-funds have flourished in the past few years. However, new concerns are bringing to the forefront how the product can confuse investors, according to The Wall Street Journal.
Lately, ETFs have begun to shy broadly away from the performance of the benchmarks they are supposed to follow. Victoria Bay Asset Management’s U.S. oil fund has fallen more than 15 percentage points behind the oil price it was designed to track. Claymore Securities’ ETF structured to track oil performed the opposite as it was intended and had its oil price fall when oil prices rose. Examples such as those can hurt shareholder returns.
Occurrences like these are expected occasionally in the funds, although, “it’s not what we desire,” said Greg Drake, a Claymore Securities executive.
Also, when the performance of newer ETFs are theoretically backtracked, they sometimes fail to match up to the rate of return they would have had if they had existed in previous years.
However, when the WisdomTree High-Yielding Equity Index was back-tested, its average annual returns outperformed the Russell 1000 Value Index for several time periods, including by more than three percentage points for the 10-year period ending in March.
ETF providers are starting to come up with creative ways to dice up the market. Rye Brook, N.Y based- IndexIQ filed with regulators to start a family of 20 ETFs aimed at individual investors recently.
Intangible assets such as consumer loyalty can add substantial value to a company, said Adam Patti, chief executive at IndexIQ. “These products are not specialized, but fully diversified” across different company sizes and investing styles, he said.
Taxe-related issues are also a concern. Usually, ETF investors can avoid capital-gains taxes that plague mutual fund investors. However, more and more, ETFs are making capital-gains distributions. Around 6% of ETFs paid out capital gains last year, compared to 3% in 2006, according to Morningstar.
The issues are arising in a small number of ETFs, but it does indicate an essential change in a sector known for its predictable performance. ETFs are becoming more popular, and investors should pay attention that some new funds may come with risks and the potential to delver unexpected results.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.