Some ETF investors are gluttons for punishment, according to an analysis of buying patterns and product flows.
“The old Wall Street chestnut of ‘Money chases performance’ stands on its head in ETF land, at least when looking at the top and bottom 30 ETFs with a three year record,” says Nicholas Colas, ConvergEx Group chief market strategist.
The worst performing 30 funds, with an average loss of 83%, have managed to draw over $14 billion of fresh capital over the last 36 months, Colas said in a note Wednesday. The best performing 30 names — up an average of 142% — have only pulled in $5.5 billion. And the top 10 funds have actually lost assets.
Most of the best and worst performing ETFs are leveraged funds geared to magnify the market’s return on a daily basis. They’re designed as trading vehicles rather than buy-and-hold investments.
However, one unleveraged product that has destroyed an astonishing amount of investor capital the past three years is iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX).
The exchange traded note has a market cap of $1.7 billion, according to issuer Barclays. The ETN is designed to replicate the performance futures contracts based on the CBOE Volatility Index. The VIX is known as Wall Street’s fear gauge and tends to rise when stocks are selling off. [Top ETF Wealth Destroyers]
Among the worst-performing exchanged traded products, VXX has seen the biggest inflows over the previous three years, according to Colas. VXX has a three-year return of -94.7% but has raked in an amazing $4.8 billion of inflows, he points out.
The other worst performers include leveraged inverse ETFs that bet against stocks, precious metals and Treasury bonds.
Conversely, some of the best ETF performers are leveraged funds that take the bull side, rather than bearish bets.
“What can we take away from this admittedly — and deeply — counterintuitive data? First, remember that we are talking about the extremes here. These are the best and worst 3% of the ETF/ETP universe that have made it to their three year anniversaries. As such, the notion that investors pile into losing products isn’t a fair characterization of overall behavioral patterns,” Colas wrote.
“But there is a message in the jagged edges of the best-and-worst list we present: throughout the last three years of generally rising markets for stocks and other assets, investors have been white-knuckle scared of another meltdown,” the strategist added. “When money continues to flow into essentially ‘Insurance’ products rather than ‘Leveraged Long’ funds after a multi-year rally, it doesn’t really matter. It is a vote of no-confidence. You can take that as very bullish, or very bearish. But the truth, like these returns, clearly sits at one of these extremes.”