Uh-oh. There appears to be some fallout over a story about the worst exchange traded funds (ETFs) of 2007.

Jeffrey Ptak of Morningstar took a look at his picks for the worst performers, singling out a few funds that were victims of bad timing, launched as certain sectors were hitting their peaks. Emerging markets, real estate and even natural resources were among them. As an example, he cited the SPDR S&P China (GXC) and the First Trust ISE ChIndia (FNI).

Ptak’s pick for the worst ETF, however, is the Claymore Clear Global Timber (CUT), which launched in November. He says that there’s a big difference between investing in timber forests and investing in forest companies, which is what CUT does. As a result, there are factors such as cost-efficiency, exchange-rate fluctuations and more that can put a drag on returns.

Christian Magoon, head of the ETF group at Claymore, wonders if Morningstar "gets it."

"USO doesn’t invest in barrels of oil. Deustche Bank doesn’t own corn, wheat and livestock. [CUT] was the best investable option for retail investors who don’t have tens of millions, or hundreds of millions, to invest in actual land," Magoon said.

"To get an award based on misrepresentation, I think, is a big stretch in my opinion."

Investors can buy actual steel and oil, he said, but it’s not practical. "We feel we’re giving investors access to things they couldn’t before. We clearly disclose that we’re equities."

The bottom line, Magoon said, is that investors are simply being given more choices and that’s never a bad thing. "We’re trying to give investors, who are free to choose, tools they can use that are a lot less expensive than mutual funds…the more choices consumers have, the better off they are."

Today, Matthew Hougan at IndexUniverse also took issue with the story. While he sees no problem picking bad funds, as there were more than 200 launched last year and some are bound to be duds, he doesn’t understand the picks. Hougan wonders if Morningstar understands ETFs at all, in fact.

Hougan says that GXC was actually one of the best ETFs launched last year, especially compared with the iShares FTSE/Xinhua 25 (FXI). It actually offers a more diversified portfolio and broader exposure to China.

While some investors might find that these funds work great in their portfolios, others might not see it the same way. As Magoon said: investors have choices.

Tags: China, Corn, Emerging Markets, FXI, GXC, Steel, USO, Wheat

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