Index Universe had a fun post isolating the five worst ETFs of all time. What this was really about was the five worst performing ETPs of all time. Their search found five funds all down 90% or more since their respective inceptions.
The five were:
Market Vectors Solar (KWT) down 90.42%
Guggenheim Solar (TAN) down 90.48%
iPath Natural Gas ETN (GAZ) down 92.59%
iPath VIX ETN (VXX) down 95.21%
US Natural Gas ETF (UNG) down 96.23%
The list is interesting for a couple of reasons. Two of the five are solar and two of the five are tied natural gas. Also only two them, the solar funds, are plain vanilla. The ETNs have been done in by contango and lower prices in the underlying. Contango refers to the expense incurred when rolling a future contract out to a further month where the price of that new contract is greater than the proceeds from selling the expiring contract.
The consequences of contango were no doubt underestimated by most market participants in the early days of these funds but in terms being the worst ever they still have assets and are popular trading vehicles so I doubt the providers think they are the worst funds ever.
The “failure” of the solar funds is a different matter and I don’t think of them as being bad ETFs (neither did Index Universe). I have generally been down on this group since this became a hot fad a little over four years ago; I don’t think the economics work even if the technology does and would solve several problems.
The market voted with its feet on the stocks and the ETFs have tracked that performance. This is a positive for the ETF industry in that the lousy returns are attributable to the stocks in the group not the wrapper.
Ideally a plain vanilla ETF (an ETF that just owns a basket of stocks) will boil down to the investment merits of the underlying and whether or not the diversification offered from an ETF is better than choosing an individual stock or not.
The most exotic I believe we have gotten with an ETP is the Pro Shares Ultra Short S&P 500 (SDS) which is not plain vanilla–no position in this fund now, we sold it in November and I would have no problem buying something like the WisdomTree Managed Futures ETF (WDTI), conceptually speaking, that is not a recommendation.
Like with just about any investment strategy or product, people will do serious damage to their portfolios when they have way too much exposure at exactly the wrong time. There will be another crisis, real or perceived, and many of the exotic products will again malfunction and although any such malfunction would be short lived someone people would be badly damaged.