Five ETFs That Don't Cut It

Not all ETFs are created equal, and some ideas are outright dumb. While an ETF might look good on paper, the fund's success is the result of a number of factors. Invent the greatest product of all time? It won't matter much if no one wants to buy it.

The ETF market has expanded dramatically in the last few years, and while some ideas have caught on, others have floundered or even shut their doors. Whether it is lack of investor interest, bad design or plain redundancy, these ETFs do not make the grade.

No. 1. PowerShares NXQ Portfolio ( PNXQ). Think that most ETF names are painfully descriptive? Here's one that will keep you on your toes. PNXQ tracks the Nasdaq Q-50 Index that is designed to track the performance of the 50 securities that are "next in line" to replace the securities currently included in the Nasdaq 100.

This ETF gives investors exposure to stocks on the verge, but this fund is on the verge of flat-lining. The three-month average daily trading volume of this fund is just 1,200 shares.

Investors just don't seem to like next-in-line investments, and because of natural reshuffling, shareholders never know what they're going to get. PNXQ gives investors exposure to whatever happens to be next, which could dramatically change over time.

This ETF is a fund without a theme. Sure, all of the stocks in PNXQ have something in common -- that they're nearly in the Nasdaq 100 -- but the ties that bind them have not presented investors with a compelling reason to buy this fund.

No. 2. Claymore/Morningstar Information Super Sector Index ETF ( MZN) and Claymore/Morningstar Manufacturing Super Sector Index ETF ( MZG).

Do I get fries with that? These two "super" sector ETFs rely on a "proprietary methodology" developed by Morningstar. Both MZN and MZG trade less than 1,000 shares a day and contain hundreds of underlying components. By trying to cast too large of a net, these ETFs miss the mark. Investors can't quite tell what Morningstar is up to, judging by Claymore's info on the funds, but they know it involves revenue, income and 10-K's.

Some of the most successful ETFs are those with the simplest methodologies. Many ETF issuers have "calling-card" methodologies. iShares is known for capitalization-weighted funds; Wisdom Tree for dividend and earnings-weighted funds, etc. The less transparent and straightforward a fund's selection system is, the harder it is for investors to take a chance on it. These two funds may simply be guilty of trying to do too much at once.

No. 3. Claymore/Robb Report Global Luxury Index ETF ( ROB). Maybe The Robb Report magazine is shedding subscribers like other popular publications, or maybe ETF investors are wary of an index from the maker of a magazine.

ROB tracks retailers, travel and leisure firms, and investment and other professional services firms selected by the magazine's publisher, CurtCo Robb Media. This ETF takes aim at luxury goods producers in what the indexer "generally defines" to be established countries.

There are too many moving parts to this fund, and investors aren't convinced of the financial advice from this particular magazine maker. The criteria for this fund set an uncertain scope, and the methodology might simply be too subjective for ETF investors. Participants in the ETF market generally like clear, transparent weighting strategies, which may be one reason that this ETF has not caught on.

No. 4. WisdomTree Middle East Dividend Fund ( GULF). While this fund may not be a bad idea in the years to come, these equity markets may be too uncertain for now. Investors need only to let their minds drift back to India to be wary of the "tradeable access" that this fund will really have.

When iPath's India ETN (INP) saw a rapid influx of assets, India's securities regulator moved to limit the influx of overseas capital into its stock markets, and the consequent appreciation of its currency. This created a major problem for ETF investors who "paid up" dramatic premiums to buy shares.

It isn't about oil; it's about practicality. It isn't about methodology; it's about real life. The problem with many emerging markets is that they are just that -- emerging. Emerging markets can have very different sets of rules concerning equities and outside investments -- and these rules can change. While Gulf states' dividends certainly make a compelling investment idea, there may be too many outside factors to make this fund popular right now.

No. 5. Elements Global Warming ETN ( GWO). GWO is a fund with a glass-half-empty strategy. GWO is designed to offer investors exposure to "50 exchange-listed companies with business segments that have an increased focus on products or services related to minimizing global warming." While global warming is certainly an important topic for discussion, the lack of consensus on this particular term may be one cause for lack of volume in this fund.

GWO also entered a crowded market when it debuted in 2008. PowerShares already had several "green" ETFs on the market, and the PowerShares Wilderhill Green Energy has a robust following. Maybe investors gravitate toward a glass-is-half-full strategy. While PBW and GWO essentially aim to do the same thing, PowerShares' packaging has a more positive spin. Perhaps the bias is a bit unfair, but the proof is in the pudding. On July 2, more than 700,000 shares of PBW changed hands, while not a single share of GWO traded.

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

More from Personal Finance

Mortgage Interest Rates Drop to an 18-Year Low

Mortgage Interest Rates Drop to an 18-Year Low

9 Best Investment Books for Beginners

9 Best Investment Books for Beginners

How to Calculate Your Net Worth and Pin Down Your Financial Health

How to Calculate Your Net Worth and Pin Down Your Financial Health

The Best States for Millennials' Money and Health

The Best States for Millennials' Money and Health

U.S. Banks Urged to Make Small Loans In Competition With Payday Lenders

U.S. Banks Urged to Make Small Loans In Competition With Payday Lenders