Market Pulse: Resist temptation
August 14, 2018
"I can resist everything except temptation."
— Oscar Wilde
Last week's article discussed the growing popularity of index funds. One reason for their popularity is their very low fees. Those fees just got even lower.
Fidelity Investments announced that they are offering two new broad-based index funds that have no management fees. They also lowered the fees on their existing index-based funds. That is good news for investors, but are all index funds attractive? Not so fast.
There is a dark cloud over leveraged funds, especially inverse funds. Those funds allow investors to use leverage without borrowing and inverse funds allow them to bet against stocks without shorting. Unfortunately, most don't perform as one would expect.
As an example, let's look at the Direxion Financial 3X Shares long and short funds. Both funds began in November 2008 at the worst of the financial crisis.
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One would expect that the gains in the triple levered long fund would about offset the losses from the triple levered short fund. Not so. The long fund has only gained 5.6 percent while the short fund has lost 58 percent. These funds might play a role in an active trader's portfolio but levered long and short funds are terrible investments.
My July 30, 2015 article "The World's Worst Investment Has Been …" was about gold. I'm still not a gold bug, but there is an even worse investment.
Consider VelocityShares Daily 2X VIX, which is a leveraged index fund tied to the VIX (a volatility index). It has lost 29 percent over the last month, 32 percent over the last year, and has lost 86 percent over the last three years. Since 2011 the index that it tracks has lost 99 percent of its value. Yet the fund has $450 million under management. Yikes. Don't be tempted to play for a rebound.
Compare those losses to ETFs that hold dividend paying and raising stocks. ProShares S&P 500 Dividend Aristocrat (NOBL) holds S&P 500 companies that have increased their dividends for at least 25 consecutive years. Since 1987, dividend growers have outperformed other stocks and have been less volatile.
Vanguard Dividend Appreciation (VIG) also holds dividend-increasing companies and has a super low expense ratio of 0.08 percent.
A good investment is one for which the odds of success improve over the long run. The stock market has risen on 54 percent of the days, 58 percent of the months, and 73 percent of the years. That's ideal.
The same can't be said of leveraged short funds and leveraged long funds, which decay over time. Don't be tempted.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.