Most people have a fascination with highly destructive events, such as volcanos, earthquakes and Justin Bieber concerts. But some mutual funds have a remarkable history of wealth destruction — and you should keep your clients (and yourself) clear of them.
Consider iPath S&P 500 VIX Short-term Futures ETN (VXX), which invests in volatility futures. Presumably, investors use the fund as a hedge against sudden declines. In the past five years, investors have shoveled an estimated $5.4 billion into the fund.
The ETN has rewarded them with
little but heartbreak: It has lost an average 59.2% a year for the past five years, according to Morningstar (MORN). The fund has lost money every year, but managed to shed 68.3% last year. Remarkably, the fund has $1.1 billion in assets.
One reason for the fund's rotten performance has been the stock market's relative tranquility, at least as measured by S&P 500 short-term volatility futures. Another reason is that the index continually rolls into long futures contracts, which often are higher than the price of expiring ones. They're buying high and selling low.
Many of the volatility funds have similarly snakebit records, or worse. ProShares Ultra VIX Short-Term Futures (UVXY) has averaged an 89.6% annual loss the past five years, according to Morningstar. The fund has watched $3.7 billion pass through it. At the moment, it has $330.3 million in assets.
Of course, volatility futures aren't the only way to turn a dollar into change. Adding leverage in either direction will do the trick as well. Direxion Daily Gold Miners Bull 3X (NUGT) is a triple-leveraged fund that has averaged a 66.2% annual loss the past five years — and that includes a 57.3% gain in 2016. But the fund plunged 95% in 2013.
And sometimes, simply betting on the price direction of commodities will put you in a dark place.
United States Oil (USO), for example, has fallen an average 21.5% a year the past five years. The fund's estimated net flow: $2.9 billion. While the fund gained 6.6% last year, the plunge in oil prices fell 46% in 2015 and 42.4% in 2014.
Specialization is another way to lead to wealth destruction. The GlobalX Uranium ETF (URA), for example, tracks the Solactive Global Uranium Total Return Index. Investors have put an estimated $295.5 million into the fund, but are unlikely to give it a glowing review. The fund, which now has $250.6 million in assets, has fallen an average 20.1% a year.
The fact that lots of money flowed into a fund with a terrible record doesn't necessarily mean that everyone who invested during that period lost money. Commodity and volatility funds are typically considered trading vehicles, not long-term investments.
Many of the funds that get big infows and suffer big losses, such as the volatility funds, are “the confluence between
fighting the last war and fancy financial engineering,” said Russel Kinnel, Morningstar's director of manager research. Most investors would have been well rewarded by owning a volatility fund during the financial crisis, for example.
But leveraged and highly specialized funds probably have more losers than winners, even though they are ostensibly geared towards sophisticated investors. “They're not much different than playing daily fantasy sports games,” Mr. Kinnel said.” They're more of a coin flip than you'd see in a normal mutual fund.”
