Bottom Line: Remember to consider a number of different factors before establishing a position; placing too much emphasis on any one metric is rarely a smart idea.

77. Take A Look At "Contango ETNs"

When attempting to access asset classes such as commodities or volatility through futures-based strategies, investors often become frustrated with the headwinds presented by contango. There's no easy solution to this problem, but there are a number of creative products that seek to exploit some inefficiencies in various futures markets. Specifically, UBS maintains a suite of ETNs that combine long exposure in mid-term futures with short exposure in short-term futures with the goal of creating a portfolio that offers access to the underlying asset while also mitigating the adverse impact of contango.

These are somewhat complex, but potentially very useful products:

Long Short S&P 500 VIX Futures ETN (XVIX)
Natural Gas Futures Contango ETN (GASZ)
Oil Futures Contango ETN (OILZ)

Bottom Line: There are a number of ETFs that actually strive to take advantage of contango across futures markets.

78. Sampling Doesn't Mean Replication

Many investors assume that index-based products, such as most ETFs, achieve their investment objective by holding a portfolio that mirrors the specified benchmark. But often that's not the case at all. Almost all ETFs maintain the flexibility to engage in something called "sampling," which involves constructing a portfolio of only a portion of the total universe of a larger index. There are a number of reasons for taking such "shortcuts," since in many cases it is not practical to build an ETF with thousands of individual holdings (including some with significant liquidity issues).

It's important to understand that sampling isn't necessarily a bad thing; in many cases, it helps ETFs keep costs down and avoid bad execution on thinly-traded securities. It can result in tracking error, and those wishing to avoid this phenomenon would be advised to seek out products that match the underlying index perfectly.

Bottom Line: Not all index-based products are constructed the same way; a "sampling" strategy may offer reduced expenses at the cost of tracking error.