Those who are rich or relatively rich in America are responsible for much of our consumption. By some estimates, the top 20% of income earners in the U.S. are responsible for more than half of all money spent.
In an effort to cash in on that elite group, one exchange-traded fund, the Claymore/Robb Report Global Luxury fund, focused in on companies that generate most of their revenue from sales of luxury goods. In hindsight, it couldn't have come public at a worse time.
Why it seemed like a good idea
When the fund started back in mid-2007, investors' views about America and the world were fundamentally different than they are now. Many expected the rich to keep getting richer, with new wealth being created in emerging countries that would lead to increased consumption throughout the world. If that had happened, luxury purveyors would probably have seen their top lines continuing to grow, and their stocks would likely have continued to perform well.
In particular, the fund offered a quick way to get instant diversification into dozens of companies. The stocks the ETF holds include both American and international companies, including Mercedes maker Daimler
As it turned out, the ETF's timing was terrible. Once the recession hit, consumer spending fell sharply even among the rich, and the ETF lost 50% of its value in 2008. In particular, auctioneer Sotheby's
But there were other reasons why you might not have wanted this ETF in your portfolio. A main consideration of any fund is how it fits in your overall investment plan. You may already own a number of its top holdings in your other funds, or perhaps as individual stocks.
You may also be turned off by its fees. The fund's annual expenses of 0.70% aren't completely unreasonable, but with broad-market index funds, such as SPDR Trust
What to look for
The key is that whenever you study any ETF, make sure you look at it from several angles. Don't just look at its returns. Don't just look at the broad index or narrow niche it tracks. Look at those factors in combination with its fees, and the fees and returns for similar offerings. Compare its performance to its benchmark index, as well as competing offerings. Aim to get the biggest bang for your bucks.
In addition, realize that many ETF offerings seek to capitalize on prevailing trends. That can work out great for investors when those trends persist -- but if they reverse quickly, as happened with luxury sales, then shareholders often end up paying the price.
In any event, I encourage you to learn more about ETFs by visiting our ETF Center. It features information on how ETFs stack up against mutual funds, how to develop an investment strategy with ETFs, how to avoid pitfalls, and how to steer clear of ETF impostors.
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This article, written by longtime Fool contributor Selena Maranjian, was originally published on Nov. 2, 2007. It has been updated by Dan Caplinger, who owns shares of SPDRs. Coach is a Motley Fool Stock Advisor recommendation. Sotheby's is a Motley Fool Hidden Gems pick. The Fool owns shares of SPDRs. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.