5 scary examples why investors should avoid new funds

By
USA Today
October 6, 2008, 10:46 PM ET
3 min read

— -- You'll often hear about brand-new funds that are shooting out the lights. Unfortunately, many new funds will put holes in your portfolio, too. The third quarter's carnage gives us five good examples of why new funds can be so bad.

JPMorgan Russia C •Inception:Feb. 27, 2007•3rdQ return:-47.3%•Most awful feature:Geographic specialization

Even though Russia's a big country, its stock market is still fairly freewheeling and subject to sudden economic and political shocks. The decline in the price of oil, one of Russia's main exports, didn't help the Russian stock market. A more broadly diversified European or emerging markets fund would have taken a much smaller hit.

Market Vectors Steel •Inception:Oct. 10, 2006•3rdQ return:-54.0%•Most awful feature:Industry specialization

Specialty funds are, by definition, not terribly diversified. But when you specialize in the stocks of a particular industry, rather than a market sector, you're just asking for trouble. The fund soared 98.12% in the 12 months ended October 2007 but gave much of that back this quarter alone.

United States Natural Gas •Inception:April 18, 2007•3rdQ return:-47.3%•Most awful feature:Commodity specialization

You can make the argument that adding a broad basket of commodities to your portfolio is a good diversification move: Stocks, bonds and commodities tend to move in different directions. Unless you're working in the natural gas industry, however, you have no good reason to invest in a fund that specializes in the price movements of the commodity, as this fund does.

ProFunds Ultra Latin America•Inception:Oct. 19, 2007 •3rdQ return:-59.6%•Most awful feature:Combination of geographic specialization and leverage

The Ultra Latin America fund uses futures and options to double the daily performance of the Bank of New York Latin America 35 ADR Index. Leverage is a wonderful thing when the market rises. When it falls? Not so much. The fund's best three-month period since inception has been a 31.2% gain. Its worst period was the past quarter.

DB Crude Oil Double Long ETN•Inception date:June 16, 2008•3rdQ return:-49.4% •Most awful feature:Combination of single commodity and leverage

When commodity traders talk about going long, they mean they're betting that prices will rise. This exchange traded note pledges to gain twice as much as the price of oil when it rises, and to lose twice as much when it falls. To add another element of risk: Exchange traded notes are simply pledges to pay by the issuing institution, and are therefore only as good as the company that stands behind them.