4 ETFs You Should Keep Your Eyes On

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The universe of exchange-traded funds just keeps getting bigger and bigger. With much more than a thousand ETFs in existence -- and more coming out every day -- it's almost impossible to keep track of all of them.

Fortunately, out of all those ETFs, only a few really warrant a lot of attention in the current market environment. So without any further ado, let's take a look at four ETFs that smart investors are watching right now.

United States Natural Gas (NYSE: UNG  )
Natural gas prices have been front-and-center of every discussion of the energy industry over the past several months. With natural gas falling below the $2 level before bouncing back in recent days, gas producers have had a tough time making ends meet, while gas consumers like electric utilities couldn't be happier. But with more producers choosing to stop producing at a loss, prices seem to be looking to find a floor from which to stage a potential bounce-back.

The United States Natural Gas ETF lets short-term traders take advantage of moves in the price of natural gas futures contracts. But for longer-term investors, the fund suffers a fatal flaw -- a quirk in the structure of the gas futures markets has produced much larger losses than the drop in spot gas prices would suggest. This ETF is only a good bull play if you expect a quick turnaround for natural gas.

PowerShares Financial Preferred (NYSE: PGF  )
Preferred stocks differ from common stocks in that preferreds tend to pay higher dividends but provide more share price stability. That's appealing to conservative investors, especially those who don't need capital appreciation from their portfolios.

The broader preferred-stock ETF iShares S&P U.S. Preferred (NYSE: PFF  ) has some non-financial issues within its portfolio. But for the most part, the majority of preferred offerings are financials, and so sticking with the niche focus of the PowerShares ETF is just as realistic a picture on the market. Again, investing in the ETF is purely optional, but as a barometer on the true health of financial institutions, the PowerShares ETF gives you a worthy gauge.

Direxion Daily Small Cap Bear 3x (NYSE: TZA  )
In general, investing in leveraged ETFs is fraught with peril. Long-term investors will almost inevitably find their returns eroded by the daily tracking structure of the derivatives that these ETFs own, turning even correct predictions about the future direction of a market into unprofitable investments.

But watching leveraged ETFs can be very lucrative. As a gauge of retail investor sentiment, it's useful to watch volume on bull and bear ETFs -- especially ones in less-followed markets, like this small-cap-oriented fund. When big bearish bets come into play, you can anticipate a big move -- although reasonable people may disagree about whether going against the tide or with the herd is the better strategy.

iPath S&P 500 VIX Short-Term Futures (NYSE: VXX  )
Volatility is a core element of investing. But investing in volatility has come into vogue recently, as traders seek to cash in on changing expectations of how choppy the markets will be in the near future.

Like United States Natural Gas, the iPath ETN is another example of how derivative-owning exchange-traded products can diverge from the spot values of the indexes they track. The iPath ETN may give you an easy way to bet on short-term volatility changes, but long-term investors should steer clear.

Keep watching
ETFs abound, but focusing on the right ones can give you a snapshot of the entire market. Although you probably shouldn't buy most of these ETFs, keeping an eye on them will give you clues to trends you can use to profit.

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Fool contributor Dan Caplinger finds ETFs fascinating. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can rely on The Fool's disclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2012, at 1:54 PM, fool3090 wrote:

    I agree with the advice to watch but don't own these ETFs. I have a basket of widely diversified ETFs (equity and bond) in my Roth and Traditional IRA accounts. These are tied to well-know, well-understood indices: VEA for Europe, VNQ for real estate REIT, VWO for emerging markets etc. The key here is low, low fees; broad diversification; reinvested dividends and at least yearly rebalancing with the account held in an online brokerage with low fees.

    Pretty boring stuff.

    The four ETF/ETNs mentioned in this article scream "Danger!" VIX doesn't even have any assets behind it; you are trading (not investing... trading) in volitility (thin air). That's betting/gambling. Not for me. Same with small cap bear 3x (TZA). You're dabbling in derivatives, which are way too complex for this Fool. The only compelling issue is the preferred shares, but it's concentrated in financials.

    It's OK to watch these -- but only from a safe distance.

  • Report this Comment On April 26, 2012, at 9:30 AM, zman88 wrote:

    How do Fools recommend buying insurance against a significant market downturn in order to hold onto growth & dividend paying stocks through these highly volatile times if not by utilizing expensive ETF's?

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