Volatility, Natural-Gas, Food Funds Slump

NEW YORK ( TheStreet) -- Re-crossing the Dow 10,000 threshold signals a retreat of bearishness in the stock market, adding confidence to U.S. consumers and businesses. The CBOE SPX Volatility Index, a measure of bearish sentiment, has steadily dropped back to pre-panic levels over the past year.

No exchange traded product did worse than the iPATH S&P 500 VIX Short-Term Futures ETN ( VXX) in the third quarter. It fell 27%. (Inverse and leveraged funds were excluded.) The exchange traded note currently bets investor money on CBOE VIX October and November 2009 futures contracts, each day rolling more of the October contracts into November. This was the wrong time to gamble on higher volatility.

The commodity plays of worst performers fall into one of two categories: energy or food. Of the five energy funds listed, the United States Natural Gas Fund ( UNG) lost 15% of its value last quarter as the spot price of Henry Hub natural gas declined 11.4%.

The United States Oil Fund ( USO) leaked 4.6%, even with the spot price of West Texas Intermediate crude oil gaining 1% for the quarter due to the inherent risks of the fund's investment strategy, including risks associated with trading futures contracts. The iPath Dow Jones-UBS Energy Subindex Total Return ETN ( JJE) has an index mixture of 51% West Texas Intermediate crude, 24% natural gas, 14% unleaded gasoline and 11% heating oil. The basket combined for a loss of 5.2% in the third quarter.

If the ninth-worst performing ETF, the PowerShares DB US Dollar Index Bullish Fund ( UUP), continues to slide and gasoline inventories continue to tighten, the broader Energy Subindex ETN could become the best of the worst performers in the coming months.

Two of the three food-related investments target grain, with ELEMENTS Linked to the MLCX Grains Index Total Return ( GRU) and iPath Dow Jones-UBS Grains Subindex Total Return ETN ( JJG) crumbling 11% and 9.5%, respectively. The underlying index for Elements grains comprises 46% wheat, 27% corn, 19% soybeans and 8.9% soybean oil. On top of lackluster global wheat demand, the USDA is expecting the U.S. to produce the second-largest wheat crop on record, limiting the likelihood of a sustained rally.

The iPath Dow Jones-UBS Livestock Subindex Total Return ETN ( COW) sank 5.5%. Cattle ranchers that suffer through weak global demand for meat and high corn prices in 2008 are looking at an upcoming corn crop that may be the second largest ever. Feedlots are buying more young cattle, adding to the herd size in an attempt to take advantage of the lower feeding costs. This may limit upside potential for beef prices.

Worst-Performing ETFs in the Third Quarter
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Source: TheStreet.com Ratings

To find the best rated exchange-traded funds, check out our Top Rated ETFs page.
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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