According to the Casey report, another misleading fund name belongs to the United States Oil Fund (USO), which was designed to follow WTI crude oil prices. Instead, investors can find their assets going in the opposite direction from crude oil prices because the fund does not actually hold any oil. Instead, it maintains positions on the futures markets.
"To really understand how the fund works, one has to understand the shape of the crude-oil forward curve, which defeats the original point of making the ETF a simple commodity investment," Casey says.
Similarly, the United States Natural Gas Fund (UNG) and some other ETFs that would seem to be commodities are actually holding futures contracts. These examples are the poster boys for a much wider problem with these types of ETFs, Casey warns.
Even funds that hold the actual commodity that is named, such as the SPDR Gold Shares Trust (GLD), can be much more complicated than the average investor wants to deal with. In his report, Vuk notes that even though GLD has a large vault where gold is stored, exchanging one's paper shares for gold requires special permission that can be transacted only through a broker or market maker.
Furthermore, GLD is structured as a grantor trust, which differs from most other ETFs. In GLD's case, investors pay taxes on the underlying asset--i.e. gold. But gold is considered a collectible and is taxed at a high long-term rate of 28%, versus the 15% capital gains rate for most long-term ETF holdings.
"Just because these funds are misleading doesn't necessarily mean that they're all bad," Casey says. "The key point is that you have to first understand an investment before you can decide whether to make it part of your portfolio."