Exchange-traded funds can be a great way for investors to make money over the long haul. Yet there are also ETFs that are oriented more toward short-term movements, and when people misuse them, it can end up costing them almost their entire investment. In particular, some major movements in certain markets during 2015 led to catastrophic losses in certain ETFs. Below, you'll learn about three of them.
Leaving you with pennies on the dollar
The worst combination for ETF investors in 2015 was energy and leverage. With prices trending downward throughout the year, those who invested in ETFs designed to give several times the daily return of key measures of energy prices and stocks of oil and gas producers got crushed if they lingered too long in the trade.
The worst performer on the year was the Direxion Daily Natural Gas-Related Bull 3x ETF (NYSEMKT:GASL), which closed the year down 97%. The ETF went through not one but two reverse splits during the year, and by the end of 2015, those who had started with 100 shares of the ETF in January had just two shares remaining as a result of the reverse splits.
Among more commonly traded ETFs, the VelocityShares 3x Long Crude Oil ETN (NYSEMKT:UWT) was the big loser, falling about 92%. The same factors hit this commodity-tracking vehicle, as the triple leverage and falling oil throughout 2015 hurt investors who stayed in the ETF all year.
A no-win scenario on volatility
Elsewhere in the market, volatility levels picked up during 2015. Yet volatility-based ETFs still didn't manage to deliver what many investors had hoped they would. In fact, unlike in past years, there wasn't any way to win through the volatility trade.
Those who believed that a more volatile market would translate to higher readings for the CBOE Volatility Index found that the exchange-traded vehicles available didn't allow them to reap any gains. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEMKT:VXX) lost almost a third of its value, and the leveraged ProShares Ultra VIX Short-Term Futures (NYSEMKT:UVXY) fell more than 77%.
Yet even those who took the other side of the trade got burned. The VelocityShares Inverse VIX Short-Term ETN (NASDAQ: XIV) fell 17% in 2015, revealing some of the structural issues with the market for volatility-related securities.
Losing big in Rio
When it comes to vanilla stock ETFs, energy funds were big losers. But another part of the global markets that provided some ugly returns was Brazil, where the iShares MSCI Brazil Small-Cap ETF (NASDAQ:EWZS) lost more than half its value and other similar funds followed suit.
Brazil suffered collateral damage from the plunge in energy and mined commodities, given the richness of natural resources that the Latin American giant enjoys. With prices for those goods falling so hard, the Brazilian economy slowed down dramatically, and political controversies also hampered the nation's economic progress. Brazil isn't entirely dependent on commodities, but until conditions in those markets improve, it will be tough for the leading economy on the South American continent to rebound fully.
These ETFs and many like them were among the biggest losers in 2015. Brazil might well bounce back given time, but for leveraged investments in energy and volatility-based securities, investors need to understand that the nature of the products themselves makes them inappropriate for long-term investors. To their credit, the managers of these ETFs do what they can to make this fact clear, but some investors nevertheless end up falling into a trap by misusing ETFs that aren't designed to serve the purpose they're looking to achieve.