The 5 Worst ETFs of 2017

If you want to pick specific investment exposure, then exchange-traded funds can be the best way to build the portfolio you want. With thousands of funds to choose from, it's easy to find ones that specialize in the kinds of assets in which you want to invest.

Inevitably, when you pick certain niches in the investment universe that you think will do well, you won't have a 100% success rate. When you look at ETFs that finished the year with at least $500 million in assets, five funds emerge as significant losers in what was otherwise an extremely strong year for the stock market. Here they are, along with an explanation as to why they did so poorly in 2017.

Data source: ETFdb.com.

A perennial losing play

Investors have waited for years for a correction in the stock market. Yet most major market benchmarks have seen a stunning lack of turbulence, seemingly moving straight up in a calm and collected manner without suffering much in the way of major downward movements. Even on a daily basis, the biggest down day in the Dow Jones Industrials in 2017 amounted to less than a 2% decline.

For most investors, that was great news. But for investors in the iPath exchange-traded product, a lack of volatility means steady losses, and those losses added up to a decline of nearly three-quarters for the year. 2017 continued a long downward trend for the iPath product, which has seen similar declines throughout the bull market. The iPath managers admit that the vehicle isn't a good investment for long-term use, but that hasn't stopped some investors from suffering substantial losses in defiance of that advice.

Energy declines

Energy was the worst performer among major sectors in the U.S. market in 2017, and the next two funds showed the difficulties in investing in energy over the past year. The U.S. Natural Gas fund uses futures to track natural gas prices, and a combination of poor price conditions and the typical state of contango in the natural gas market caused another losing year for the fund.

Image source: Getty Images.

Meanwhile, oil-services companies suffered even more than the rest of the sector. Even as exploration and production companies saw their stocks advance on rising crude oil prices, many services specialists failed to see gains, as there's often a lag between when prices go up and when E&P operators actually start ramping up their operations and demand more materials and services. That could spur a reversal in 2018, but the jury's still out as to whether recent oil price rises will stick.

Other negative trends

A couple other themes played out poorly for ETF investors in 2017. A long period of strength for the U.S. dollar finally gave way to cyclical weakness, and a particularly poor showing for the greenback against the euro played a major role in producing losses for the PowerShares U.S. Dollar Bullish fund.

In agriculture, futures prices were mixed, and that had an overall negative impact on the PowerShares agriculture fund. Sugar, wheat, corn, and soybeans all had subpar years in 2017, and they collectively make up about half the agricultural futures exposure for the PowerShares ETF. Cattle posted gains, but weakness in coffee also hurt performance. Agriculture tends to be cyclical, and so some investors are hopeful for a turnaround in 2018, but there aren't any guarantees that fundamental conditions in many crop markets will improve.

What to watch in the coming year

Value investors often look at lists like these to find good investing ideas for the future. Yet although bottom-fishing in areas like oil services might work well, trying to navigate the vagaries of volatility investing or futures-related impacts can be more complicated than beginning ETF investors should try to handle. By looking at more conventional stock ETFs, investors can get a simpler and often more effective way to add the investment exposure they want.