Traditional benchmarks, such as the S&P 500 and Russell 3000 Index ($RUA), weight companies according to their stock-market value. In a designer index, market capitalization takes a back seat to other measures. Some funds (such as WisdomTree ETFs) emphasize a company's dividend payments. Others, such as the RAFI indexes from Research Affiliates, stress fundamental factors such as a company's dividends, cash flow, sales and book value (assets minus liabilities).
These funds track the price of a particular commodity instead of an index. To do so, some exchange-traded products, such as iShares Gold Trust (IAU), buy and store the actual material. Invest in IAU and you own a bit of the fund's hoard. In other cases, however, ETFs can't buy the actual stuff. The United States Oil (USO) fund, for instance, tries to track the spot price of light, sweet crude oil by buying oil-futures contracts. But because of quirks in the trading of futures contracts, USO has done a poor job of achieving its goal.
Best bet: iShares Gold Trust, as a hedge against global turmoil, a falling dollar and the threat of future inflation.
Leveraged or inverse indexes
Bullish on India? Direxion Daily India Bull 3X Shares (INDL) might catch your eye. The ETF promises to triple the daily return of the index of Indian stocks it tracks. But the key word is daily. Because of the oddities of daily compounding, this ETF and others that seek to deliver a multiple of an index's return can wreck your portfolio. Over the past 12 months, for instance, the MSCI India index rose 18.4%, but INDL sank 13.0%. "Leveraged ETFs are not buy-and-hold vehicles," says Kanaly Trust's Shelton. Inverse funds are also dangerous -- whether they seek to simply deliver the opposite of an index, or two or three times the opposite -- because of the problem of daily compounding.
Best bets: None.
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