Sometimes, it is worth remembering that rarely is a free lunch given out on Wall Street. That is another way of saying that when a trading idea appears overly logical on a fundamental basis, it probably is and that idea is likely doomed to provide investors with frustration and a smaller brokerage account.
Worse yet, the array of all-too-logical trading ideas is not confined to one sector. In fact, these suckers bets are scattered throughout a variety of sectors and industry groups. With that many potholes out there, it is a worthwhile exercise to look back at some failed, obvious ideas so similar mistakes can be avoided in the future.
ETFs are particularly useful for this endeavor because investors frequently used these products over single stocks to express broad, thematic views such as increased consumer spending in emerging markets and rising energy prices following a natural disaster. With that in mind, here are some of the obvious ETF trading ideas that are showing signs of being epic fails.
Short Aerospace ETFs What that means is that plenty of commentators and investors thought that aerospace stocks would be rocked by the massive reductions in government spending should the fiscal cliff come to pass. What has made this trade particularly frustrating is the politicians from both parties have warmed to at least some reductions in defense spending.
Using November 7, the day after Election Day, as the time when fiscal cliff fears really took off, it should be noted that the PowerShares Aerospace & Defense Portfolio (PPA) and the iShares Dow Jones US Aerospace & Defense Index Fund (ITA) are both modestly higher.
Since late November, PPA is up almost 2.8 percent while ITA is higher by 2.5 percent, moves that show these ETFs have defied all common logic when it comes to the fiscal cliff. Those gains also indicate that traders that shorted these ETFs on fiscal cliff headlines might want to cover those positions as both funds reside about one percent from their recently set 52-week highs.
Rising Food Demand Upon entering the phrase "ETFs for food" (take off the quotation marks) into Google, one will see that it takes a mere 0.24 seconds for 37.1 million results to be returned. What that says is that the topic of rising global food demand has been addressed as a trading idea plenty of times.
On the surface, this is not a bad idea if for no other reason than that global food demand is rising. However, the problem is the ETFs used to exploit this theme. One of those products is the iPath DJ-UBS Livestock TR Sub-Index ETN (COW), which tracks live cattle and lean hogs futures contracts. That would appear to make COW a great play on increased food demand and higher livestock prices, but this ETN has a reputation for disappointment.
Over the past five years, it is fair to say that global beef demand has increased. Yet over that time, COW has plunged 40 percent.
Another ETF that is often mentioned as a play on rising food demand is the Market Vectors Agribusiness ETF (MOO). To be fair, MOO has delivered solid gains in 2012, but the fund has also lagged the S&P 500. With potash prices tumbling, MOO is vulnerable to being laggard again in 2013.
That is not even the biggest issue with MOO, though. It is the ETF's volatility relative to the returns it offers. Over the past five years, MOO has surged 22.4 percent, but with volatility of 24.7 percent. On the other hand, the SPDR S&P 500 (SPY) is higher by 33.9 percent with volatility of 18.3 percent. Investors looking to tap the "people have to eat theme" would do better with the Consumer Staples Select SPDR (XLP). Over the past five years, XLP has returned 42.3 percent with volatility of just 12.3 percent.
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