'Barron's' ETF Special Report Misses the Mark

NEW YORK (TheStreet) -- This weekend Barron's ran several articles that combined to make an ETF special report, but there were gaps in some of the ideas expressed that should be clarified to promote better understanding of the product.

In an article titled "No Magic Solution Here," Barron's said that the ETF industry was "jumping the shark" with the proposed Bitcoin ETF that the Winklevoss twins are trying to launch. "Jumping the shark" refers to an episode of the 1970s television Happy Days when Fonzie jumped over a shark tank on water skis. The term has become synonomous with being gimmicky.

Although there aren't too many people who will make an investment case for Bitcoins, Barron's suggested that because they have little or no investment merit, an ETF based on them shouldn't trade. This is misguided.

Segments of the capital market can be investment-worthy, such as blue-chip stocks; worthy of speculation, such as options purchased shortly before expiration but ahead of an earnings report; or both, such as the SPDR S&P 500 ( SPY), an index ETF held as a long-term investment and used in many short-term speculative strategies.

As Barron's points out, Bitcoins are a virtual currency. They came into existence in 2008 and can be transferred without a financial institution acting as an intermediary. The Bitcoin's value can and does fluctuate against other currencies including the dollar, and at times has been very volatile. In the last two months the Bitcoin is down by about one-third against the greenback.

Whether there is any value as an investment, there is volatility, and people like to speculate on volatile trading instruments. This is true of the various ETFs and ETNs that track the CBOE Volatility Index in one form or another.

The iPath S&P 500 VIX Short Term Futures ETN ( VXX) is down 96% since its inception, which did not stop it from trading 29 million shares on Friday or 30 million shares the day before.

Something built for speculation, like a Bitcoin ETF, will either find a trading audience and succeed or will fail to do so, close and cost its backers their investment in starting up the fund.

Another article, on the backtesting of ETF indices, tried to dissect the manner in which indices are put together and picked on the Guggenheim Solar ETF ( TAN). The backtest "reflected a golden time for solar stocks," but the fund has been a miserable performer since being issued.

The reason for TAN's decline is not a flaw in the index design but lousy fundamentals facing the solar industry, as I outlined at The Street five years ago.

That said, the composition of the index underlying is simply another factor to be considered before investing.

The iShares MSCI Denmark Capped ETF ( EDEN) is the only fund investing exclusively in Denmark. A U.S.-based investor wanting to own Denmark will either buy EDEN or an individual stock.

Any decision about EDEN has to include an assessment of Novo Nordisk ( NVO), which is a big player in the diabetes market. The stock has a 21% weighting in EDEN. It is not realistic that EDEN could do well if NVO were to do poorly.

On the positive side for NVO, it is a sad fact that diabetes is becoming a growing problem all over the world, and NVO is a leader. On the negative side, as a drug company it is subject to FDA rulings, and it is only logical to expect other drug companies to devote a lot of R&D to competing more effectively in the diabetes drug market.

If the threat of looming competition is enough to dissuade an investor from NVO, then EDEN becomes a poor choice and requires the investor to do research into other individual Danish stocks in order to gain exposure to that country.

An exchange-traded product is merely an investment choice to go along with traditional mutual funds and individual issues. Just as there are ETFs with little or no investment merit so too are there traditional mutual funds -- such as inverse funds -- and individual stocks with little investment merit, but they still exist because the issuer perceives some level of demand.

The top-down notion that products made for speculation should not exist for lack of investment merit is incorrect. A fund company that issues such an investment product is betting on demand of the market, and such a bet will either succeed or fail.

From the bottom-up perspective of the end user, the investor, a fund built for speculation is either suitable for that end user or it isn't. If there were no ETFs, people would still have to avoid speculative stocks, speculative options strategies and even speculative bonds.

At the time of publication, clients of Nusbaum's firm held shares of NVO.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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