10 of the Worst ETFs Money Can Buy

It’s typically a slow week in the financial world for the few days leading up to our collective feasts on Thanksgiving day, and that gives us a little down time to catch up on matters we typically don’t get to day to day, or even week to week.

One of those things is checking in on ETFs some people thought were a smart idea at the time, and now doesn’t look so good. Without Further ado, the Top 10 worst performing ETFs over the past twelve months:

1 Year %
VelocityShares 3x Inverse Natural Gas ETN$DGAZ-82.10%
C-Tracks Citi Volatility Index TR ETN$CVOL-80.31%
Direxion Daily Jr Gld Mnrs Bull 3X Shrs$JNUG-75.06%
Direxion Daily Jr Gld Mnrs Bear 3X Shrs$JDST-73.52%
VelocityShares Daily 2x VIX ST ETN$TVIX-73.05%
ProShares Trust Ultra VIX Short$UVXY-72.94%
Direxion Daily Semicondct Bear 3X Shares$SOXS-67.15%
Direxion Daily Russia Bull 3X Shares$RUSL-66.00%
Direxion Daily Nat Gas Rltd Bull 2X Shrs$GASL-60.71%
UltraShort DJ-UBS Natural Gas$KOLD-59.91%

(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: ETF.com

Our Notes:

  1. We’re not surprised to see 3 of the Top 10 worst performing etfs be “tracking” Natural Gas, and again – both a bull fund and inverse fund both among the worst performers (it is truly magical their ability to pull that off). Those ETFs seem to not perform well under…let me see here, ok, under most circumstances.
  2. Gold Miners still suck. (See Here Here and here.) And now they join the dubious distinction club as being one of the plays where you lose no matter whether you thought Gold Miner’s were going up or going down. This one’s even more egregious than the Nat Gas, as they are bull and bear on the same index – yet both down more than -70% in past year.
  3. The Good old VIX. Betting on Volatility is a tricky, tricky game. Betting short on the VIX over the past 5 years probably seemed like a good bet, right up until October when the VIX spiked without notice, and all the sudden you lost half of the investment.

So how did you fare? Hopefully not as bad as some of these… Have an ETF that surprised you? Let us know.

The Success Equation, Untangling Skill and Luck

The Success EquationWe like to read around here – and just recently got done with one that has been on the wishlist (it’s more like a… when the kids are quiet for 10 minutes and there’s not a client dinner or conference in town or presentation for a business deal – as time permits list, but I digress) for quite some time: Michael Mauboussin’s, “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.”

The title caught our eye right away, being in the business of untangling luck and skill to a certain extent in helping clients identify and invest in alternative investment managers. The question at the end of the day is whether the impressive track record a client is considering investing in is the result of skill, or whether it is luck. If you’re a chess player – or even tennis, it’s nearly all skill. If you’re a hockey player… it’s way more luck than your agent would care to admit.


And what about an investment manager?  How much of that track record is skill versus luck. The manager themselves usually portrays it as skillful, and charges as if it were entirely skill – but even the most successful of managers have to admit there is some skill in there. How much, and what questions should you be asking to determine the role of skill and luck are the parts of Mauboussin’s book we’re most interested in.

Here’s his handy graphic breaking down the major sports, slot machines, roulette, and trading in the stock market on a pure luck to pure skill continuum.

New Picture

Mauboussin tells us that where skill is the dominant factor, history is a useful teacher, but where luck is the dominant force, history is a poor teacher. And that the type of feedback you get is a good tool to measure how much luck there is in your endeavor. On skill side, there is a very close relationship between cause and effect; but feedback on the luck side is often misleading – where good decisions can lead to failure and poor decisions lead to success in the short run (due to luck).  For more on the latter – read anything by Nassim Taleb, who’s made a career pointing out that a lot of the skill you see in the world (the banker, insurance company, option trader, etc) is nothing more than the result of 1 out of a million people destined to be quite lucky.

Essentially – what worked in the past may not work in the future on a heavy luck endeavor (such as investments), which I guess the regulators knew long ago when they made it a requirement to put the ‘past performance is not necessarily indicative of future results’ disclaimer on investment documents.

To measure the effect of luck, he introduces us to the James Stein estimator and the ‘shrinkage factor’ (straight out of Seinfeld), shows us how reversion to the mean is highly dependent on how much luck is involved, and discusses how even when you know how much skill there is – you’re in trouble because skills deteriorate (he quotes a source as saying the peak age for matters of finance is 53, and after that our skills start to deteriorate).

We enjoyed two parts in particular.

One, the discussion of ‘the paradox of skill’, which he explains: as skill improves, performance becomes more consistent, and therefore luck becomes more important. Mathematically, if the variance in skill becomes smaller than the variance in luck – luck becomes the dominant factor. In his own words:

“When everyone in business, sports, and investing copies the best practices of others, luck plays a greater role in how well they do.”

He shows stats supporting this from baseball, where all of the hitters have gotten better, but the rough averages have remained the same. Why? Becasue the pitchers have gotten better too!  But the interesting part of this to us is in the investment realm, and more importantly – the alternative investment realm. The discussion sure gets you thinking about our modern world of global markets, derivatives, and mangers earning billions; and whether the world has become so skilled in analyzing and trading them – that any performance is due mainly to luck, and due for a healthy reversion to the mean?  It makes us think of all the money in systematic trend following, and whether there is a real world experiment in the ‘paradox of skill’ happening there before our very eyes. Are any variations in the performance of trend follower A versus Trend Follower Z due to luck? Are they outperforming due to luck in including Coffee in their list of markets – luck in risking 0.25% per trade and getting an extra Hog trade versus the guy who’s model was risking just 0.20%? And so on.  Are those differences skill, or luck?

We also enjoyed Mauboussin’s discussion of the ‘dumb money effect’, which we know as emotional investing, or getting in at the highs, and out at the lows (see our discussions on it here, here, here). He shows some stats calculating it costs investors 1% in returns each year, and that institutional investors  have foregone $170 Billion in value over a couple decades because of this dumb money effect.

Why do we do it?  We’re hardwired that way, with Mauboussin showing a survey where 2/3rds of respondents admitted they tend to rely more on judgement when analysis becomes more complex, and how we tend to give disproportionate weight to whatever has happened most recently, buying when at all time highs and getting out when at lows, causing some specific losses:

“Individual investors consistently earn results that are 50-75 percent those of market itself due to bad timing.”

And if this dumb money effect is so prevalent among individual investors and institutional alike – should we really expect our managers to be immune from it? It’s not too hard to imagine an investment manager doing their own version of the dumb money effect – changing a model around after a streak of losses, adding more markets on a model which is doing well to expand its exposure, and so forth. This is the danger to perceived skill – where changes meant to help actually result in pushing the inevitable reversion to the mean back further.

You can’t help but feel a little hopeless upon finishing the book – and realizing just how much of investing (and life) is due to luck instead of skill. But the lesson to be learned shouldn’t be to pack it in and put your money under the mattress. The lesson for us is to realize luck’s part, to realize that impressive winning streaks are just that – streaks. That depressing losing streaks are just that – streaks. And that some luck (or lack thereof) means reversions to the mean, so avoid getting in at the tops and out at the bottoms.. avoid the dumb money effect. The lesson for us is that process matters a lot more than outcome in the short run, and that the more you base your investment decisions on the recent past, the more likely you are to be disappointed.


Bad Year for Commodities, Whether in ETFs or Futures

Here’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying December futures and rolling them annually. Plus, a comparison to Ag Traders and an overall commodity index.

Some Notes:

  1. Only 4 on the commodity contracts we’re tracking are positive on the year, suggesting that buying and holding a commodity market no matter the exposure, would be enough to make you cringe.
  2. For the first time this year,  buying and holding futures contracts (on average) are outperforming their etf counterparts.
  3. While the Long/Short AG Trader’s Index looks pretty impressive sitting there at +4% or so (compared with -13% for $DBC, the all commodities ETF), it’s been a rough couple of months for the Ag Trader’s as Grain markets have bounced back from yearly lows. If looking for smart commodity exposure, there’s no better time than now to look at the Ag Traders (in our opinion).

(Performance as of 10/31/2014)

Commodity ETF Over/Under Performance 2014

Crude Oil$CL_F
Brent Oil$NBZ_F
Natural Gas$NG_F

Live Cattle$LE_F
Lean Hogs$LH_F
Average without Coffee-6.29%-7.12%-0.83%
Commodity Index $DBC-12.98%
Long/Short Ag Trader CTAs4.59%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index

Articles You Could be Reading this Weekend

CBOE Taps Rate Concerns With Futures on Bond Volatility – (Bloomberg)

Liquid alts suffer big asset drop; MainStay Marketfield takes biggest hit – (Investment News)

Mark Rzepczynski (formerly of John Henry) Interview with Michael Covel – (Trend Following Radio)

Buyer beware: Liquid alts are not created equal – (Investment News)

Hurrah For Quitters – (Five Thirty Eight)

South Carolina Wants Smaller Hedge Fund Managers – (Value Walk)

Forex Investors May Face $1 Billion Loss as Trade Site Vanishes –(Bloomberg)

Just for Fun:

The Worst College Football Game In The Worst College Football Town – (Five Thirty Eight)

Did Kim Kardashian Break the Internet? How She Compared With the Comet Landing on Twitter – (Wall Street Journal)

Former Chicago Mayor Jane Byrne Dies at 81 – (NBC Chicago)

A Super-Simple Way to Understand the Net Neutrality Debate – (The New York Times)

Onion owner exploring sale – (Crain’s Chicago)

Alternative Links: Trend Following, Managed Futures, and CTAs

Trend Following:

A New Anomaly: The Cross-Sectional Profitability of Technical Analysis – (Han, Yang, Zhou)

How Trend Following at its core is quite simple – (Top Traders Unplugged)

Predicting market direction is silly – (Michael Melissions)


CTAs push on higher in October with more positive returns, says Newedge – (Hedgeweek)

Despite Volatile October, North American Hedge Funds Up 5.2% YTD – (Valuewalk)

Autumn volatility puts managed futures top in class – (Financial News)

Positive returns drive ‘resurgent’ investor interest in managed futures – (CTA Intelligence)

Attain Funds October Performance – (Attain’s Alternatives Blog)


Corn multi-year lows and lower USDA forecast should feed bulls this winter and spring – (Almanac Trader)

Commodity Curves Bury Passive Investors – (Wall Street Journal)

Barron’s talks the sell off in Commodities without a single mention of long/short strategies (CTAs) – (Barrons)

CME Group reports a record open interest for NYMEX Brent Futures – (Metal)

Social Media:

How Endowed is your Endowment?

Vanguard has an interesting whitepaper out about how Endowments performance differs based on their size (sorry all those in the, “it’s not the size of the boat, it’s the motion of the ocean” camp… the large ones do much better), and there’s some interesting tidbits in it even though it’s a glorified ad for the type of low cost  indexing Vanguard is known for.  But instead of their normal tilt toward the retail investor,  they’re targeting the endowment space – breaking down small, medium, and large endowments vs low cost index funds and concluding that small and mid size endowments shouldn’t try and replicate large endowments success – they should just do low cost index funds (otherwise known as talking your book).

First, some of their cool charts:

    1. Endowment breakdown  (90% of all endowments are small/large)

      Endowment by sizeChart Courtesy: Vanguard

    2. The growth of Alternatives amongst Endowments of all sizes, with Large Endowments having  moved significantly above 50% after 2008 and having stayed there.Allocation to Alternatives
    3. The huge outperformance, and current underperformance of large endowments versus the traditional 60/40 portfolio:

Performance of Endowments(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Vanguard

We applaud Vanguard for the piece, and for the thoughts it brought to mind… including in no particular order the following:

  1. When do alternatives start to lose their name… If 60% of a portfolio is alternative, then it’s not so alternative… it’s the core holding.
  2. A lot of the Alternatives they talk about aren’t so alternative. See our “Truth and Lies in Alternative Investments” for more on how some of these aren’t so alternative.
  3. While the rolling 5-year Annualized returns might have suffered in 2012 and 2013, how about Yale and Harvard’s  huge outperformance of the traditional 60/40 portfolio over the past 25 years highlighted on page 2. Yale has done about 5% better (per year!)  and Harvard 3% better (per year!) over the traditional 60/40 portfolio.
  4.  This whole exercise ignores RISK… and assumes small and medium size endowments are after the highest possible returns, only.  There is a chart showing sharpe ratios, but it has well known problems (see here and here).
  5. This whole exercise ignores the fact that we’ve been in a 40 year bull market for bonds, across the entire history of this study, skewing the “40” in the 60/40 portfolio beyond what one could reasonably expect moving forward given how low interest rates are.
  6. They conveniently leave large endowments out of their chart showing endowment returns (and sharpe) against low cost funds.
  7. This is quite the opportune time to be highlighting a non diversified portfolio versus the 60/40 portfolio, given it has been one of the best 5 year runs perhaps ever for the 60/40 portfolio. The comparables won’t be as rosy when looking out 5 years from now, when aren’t coming off the 2009 lows.
  8. Digging in a little deeper on Figure 5, showing the excess return of small and large endowments over 60/40 portfolios – you can see that the endowments out perform during low periods for stocks (2000-2005 and 2008) and tend to underperform during big moves up in stocks (late 90’s, past 3 years). This is not by accident – and it’s only to be expected that when allocations to alternatives get bigger, the performance will deviate from the 60/40 performance more and more. The endowments aren’t diversifying into alternatives in order to beat the 60/40 portfolio during bull markets. Their diversifying in order to avoid being down -50% during down turn.

All in all, this looks to be another argument that diversification is dead. Call us skeptical, but we always get a little nervous when hearing “this time is different.”

Asset Class Scoreboard (where’d that stock loss go?)

The month’s Asset Class Scoreboard numbers is a perfect example of just how much noise is out there in the markets. If you were glued to your twitter feed in October, you may have been freaking out about the -5% drop, but someone who checks in monthly doesn’t even see it… October finished just fine for them after a somewhat rare stock market bounce.

And then there’s managed futures, which somehow amidst all the ‘trend following is dead’ commentary and articles about Paul Tudor Jones losing money – posted its third consecutive month of gains, and 6th out of the past 7 months, to find itself sitting in third place on our YTD scoreboard.  Of course, this is an index, not all managed futures programs are up. But just the same, it sure is nice to be around the upper tier for a while after spending most of the past few years towards the bottom.

PS – take a look at the buy and hold commodities trade, down double digits on the year as Crude Oil joined the commodity sell off in October, to join grains and metals which had done so in the month’s prior.

Table of Asset Class ScoreboardChart Asset Class Scoreboard(Disclaimer: past performance is not necessarily indicative of future results)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy Tracker ETF (QAI)
Commodities = iShares GSCI ETF (GSG); Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)