By Scott Ronalds

We could’ve had some fun with a list of the scariest Halloween costumes this year. Bernie Madoff, Allen Stanford and Jon & Kate come to mind. But we thought it would be more educational, and just as fun, to highlight some of this year’s scariest investments. Queue the Monster Mash.

Leveraged ETFs
These products, which double-up your exposure to the daily performance of an underlying investment (often a commodity, currency or market index), have scared the #*&! out of investors who bought them without doing their homework. This is because they track the daily performance of the underlying investment, not the annual performance. They are designed for short-term speculators and professional money managers, not the average investor. Take the Horizons Beta-Pro NYMEX Crude Oil Bull Plus ETF, and its sister, the Bear Plus ETF. The former is a bet on the price of oil (futures contracts) rising; the latter on oil falling. As of the end of September, the underlying investment that the ETF tracks (the NYMEX Light Sweet Crude Oil Futures Contract) was down roughly 5% on the year. Yet, the Bull Plus ETF was down 36%, and the Bear Plus product was down 42%. Yikes!

Money Market Funds
The Bank of Canada’s key lending rate sits at 0.25%. The good news is that it’s extremely cheap to borrow money if you’ve got a sparkling credit record. The bad news is that you’re looking at earning very little on lending your money to those with sparkling credit records (i.e., the big banks and corporations). After fees, investors can expect next to nothing on money market funds until the central banks raise short-term rates. Spooky prospects indeed.

Maple Leafs Seasons Tickets
1-7-2. Need we say more.

Guaranteed Target Date Funds
Marketing-driven, fee-laden, and deceptively complex is how the boss referred to these products in an earlier blog. Target date funds (also known as life-cycle funds) are managed for a particular demographic (i.e., investors retiring in the year 2010, 2020, or 2030) and the manager adjusts the asset mix as the retirement date approaches. Not a bad idea in concept. But it’s the guarantee that comes with these products that really throws them off the rails (not all target date funds come with guarantees). When the markets turned sour last year, the asset mix on several of these funds was ‘shifted’ to ensure the guarantee could be paid out and the issuer wouldn’t lose any money. The problem is that many of these funds are now invested 100% in bonds but the target end-date is 10 or more years into the future. Investors are thus faced with minimal future growth prospects and may have to hold on to the product for 10 or more years for the guarantee to kick in. Simply terrifying.

The U.S. Dollar
The greenback has had a rough year so far against most major currencies. It’s fallen roughly 15% against the loonie and is down significantly on the euro as well. With parity closer by, however, it may be an opportune time to revisit your asset mix. If it’s off balance, you may want to creep up your U.S. exposure. Or at the least, your dollar should go farther in your cross-border fireworks shopping this year.