Exchange traded funds or ETFs have garnered attention as tax- efficient competitors to traditional mutual funds. The most popular and cost-effective category of these funds has been low-cost indexing, replicating a major index such as the S&P 500 or the Russell 2000. These passive, unmanaged index funds shoulder very low internal costs and can be bought on many discount brokerage platforms with no commissions.
So it is hardly surprising that over $300 billion in assets have flowed into U.S. ETFs so far in 2017, with more than $3 trillion now parked in these funds. But with the tremendous success of the passive index ETFs has come a proliferation of murkier, costlier and more dangerous variants that give contrarian investors reason to recall historical lesson of excess preceding a fall.
Today there are around 1,700 different U.S. ETFs, with 200 new entrants coming to market each year. So far in 2017, around 80 have failed. How many more deserve to join the pantheon of investing ignominy?
Here is a sampling of some of the new offerings coming to market over the past year. You decide if these decidedly esoteric funds presage the peak of an exuberant market.
You knew it was coming. Now you can take a hit on the Horizons Marijuana Life Sciences Index (HMMJ), a collection of about 20 stocks related to Mary Jane. Its first few months proved to be a bad trip, down 22 percent, but a recent rally has it within a toke of breaking even.
If this gives you the munchies, check out the Obesity ETF (SLIM). This fund invests in companies that are "positioned to profit from servicing the obese," including heath care, weight loss products and plus-sized apparel. The fund eschewed the more obvious ticker "FAT," but its assets are decidedly skinny at just $2.5 million.
If you're into politics, there's a fund for that. Several, actually, including GOP (Republican Policies Fund) and DEMS (Democratic Policies Fund). These brand new offerings from EventShares seek to "identify winners and losers based on specific policy outcomes" and charge you 0.75 percent in fees. So far, GOP is ahead by $100,000 in assets.
If you want to make America great again, you can pick up the Point Bridge GOP Stock Tracker ETF (ticker: MAGA). This offering invests in companies whose employees and political action committees are highly supportive of Republican candidates. The prospectus notes without apparent irony that the fund is "non-diversified."
OK, sports fans, here's one for you: FANZ, the ProSports Sponsors ETF. This whopping $3 million fund tracks an index of companies that are sponsors of major professional sports franchises or national broadcasters holding rights agreements with those sports.
In case you're in a rush to lose money three times faster, check out the new USOU US 3X Oil Fund. This little nugget is a leveraged bet on higher oil prices (the 3X signifies three times the daily movement on the underlying oil price). On the other hand, bet against oil prices with USOD U.S. 3X Short Oil Fund. Leverage makes these gems triply dangerous for individual investors but especially slick for the fund's sponsor.
If this is all too much, how about a sip of Spirited Funds Whiskey & Spirits ETF (WSKY)? At least it's simple: the fund invests solely in companies engaged in the production of whiskey and spirits. Evidently blended.
Signs of excess as evidenced by kooky ideas often signal turning points in markets, especially when traditional metrics reach extreme levels. This is not a warning of an impending crash, but the tune sounds vaguely familiar to a song we have heard before.
Christopher A. Hopkins, CFA, is a portfolio manager and vice president at Barnett & Co. Investment Advisors in Chattanooga