Exotic etfs

The original floor-based exchange traded funds (ETF), a breakthrough financial products. They make good substitutes for traditional mutual funds because they trade all day like stocks, low cost, and much more tax efficient.

Today, however, there are many new and exotic ETFs coming out. In most cases, these products should be avoided:

1st Leveraged ETFs - Normal means that an index or a copy of his back is fine products. The problem arises when people buy into the new wave of leveraged ones), the dual 2 or 3 times the underlying index (or the back. They do not understand that these products are intended day of trading to copy and hence 2 or 3 times daily movement of the index. This makes them unsuitable to invest in the long term buy and hold.

For example, ask if an index is represented by 10% during the year, a fund of 2 times the index, 24% - not 20%. Perhaps even more confusing, an ETF 2-times the inverse repetition (as can be expected to) 20% decreased by 16% for the year. Again, this depends developed methods for the daily volatility is twice as high.

2nd The lack of liquidity - Some of the new ETFs are suffering from too narrow a focus. This makes them vulnerable to a lack of liquidity and free themselves from their purpose. For example, record U.S. Oil Fund Oil futures, but also, in the context of the market as a result of deviations, as it is a very thin market. The First Trust Global Wind Energy ETF is to invest in clean energy. But since only a small number of wind energy companies are investing funds investing in companies such as BP.

3rd Tax. Inefficiency - some exchange traded funds, structured to invest in metals - the SPDR Gold Shares and Ishar Silver Trust - which the grantor trusts. Hence the investor to pay tax at ordinary income - and not at capital gains rates.