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This is related to my other question. There, I was asking what exchange traded funds I should consider for inclusion in my retirement portfolio. That got me thinking: What kinds of exchange-traded funds (ETFs) should specifically be avoided?

There are thousands of ETFs and index funds out there now, and I'm guessing some of them are poor products just trying to cash in on the popularity of ETF-based investing.

So, without necessarily getting specific about particular products, what kinds of ETFs tend to be poor choices for a retirement portfolio?

For instance, should levered or inverse ETFs be used in a buy-and-hold retirement portfolio? Why or why not? Are there specific "sector" funds that should be avoided?

4

Stay away from leveraged or synthetic ETFs. This answer talks about why leveraged ETFs are dangerous.

There are numerous articles to be found by searching for "leveraged etf". My answer to this question links to one of the more accessible explanations I've read.

  • Indeed. The problem is that leveraged ETFs generally track daily returns, giving downticks more weight than upticks. For example, compare QQQ with it's 2x and -2x leveraged counterparts: google.com//… – Joseph Tanenbaum Apr 4 '11 at 2:03
3

As with ANY investment the first answer is....do not invest in any that you do not fully understand. ETF's are very versatile and can be used for many different people for many different parts of their portfolio, so I don't think there can be a blanket statement of "this" one is good or bad for all.

3

One of the key things to look for is trading volume. I think the price spread will be better on high volume ETFs, which means you'll be able to sell for more when the time comes. Check Google or Yahoo finance for those stats.

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