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Worst-performing passive funds since the financial crisis

The industry’s worst-performing passively managed equity products have at least one thing in common: high fees.

In 2007, passive funds accounted for 20% of all U.S. equity assets, according to Morningstar data. Since then, that number has nearly doubled. In their search for low-cost products, clients moved $662 billion to the funds in 2017, alone. It’s no surprise that the average worst-performer cost significantly more than those at the top of the pack, explains Greg McBride, chief financial analyst at Bankrate.com.

“The more you split hairs, diving deeper into specific sectors or going country-specific, the higher the cost to operate the fund,” McBride says. “Even though passive funds hold a cost advantage relative to active funds, they’ll still carry higher costs than those invested in a broader index.”

The worst-performers had an average expense ratio of 0.70%, 50 basis points higher than the average index equity ETF, which fell to 0.21% in 2017 from 0.34% in 2009, according to ICI. These fees were actually closer to the cost of the average actively managed equity mutual fund, which fell to 0.78% in 2017 from 0.82% in 2016.

With returns ranging from -2.3% to more than -30%, the biggest losers of the past 10 years came from portfolios positioned in natural gas, crude oil and precious metals, according to Morningstar data. The worst 20 funds house a combined $27.3 billion in client assets.

Those sectors “struggled over the last decade, and in large part because there was a massive oil price unwind,” McBride says. “Seeing oil fall from $140 per barrel in 2008 to sub-$30 before beginning to rebound, sealed the fate for many of these funds.”

These returns, in particular, act as a reminder to advisors that they should not be in the business of chasing performance, McBride notes. “If you’re buying into a sector that has trounced the others, you’re likely setting yourself up for disappointing underperformance,” he says.

Scroll through to see the 20 passively managed funds with the worst returns over the past decade. Daily return figures are as of Sept. 6. Funds with less than $250 million in client assets and investment minimums over $100,000 were excluded, as were leveraged and institutional funds. We also show three-year returns, assets and expense ratios for each fund. All data from Morningstar Direct.

United States Natural Gas
Invesco Solar ETF
iPath S&P GSCI Crude Oil TR ETN
ProShares Short QQQ
United States Natural Gas
ProShares Short S&P500
Invesco DB Oil
iShares S&P GSCI Commodity-Index Trust
iPath Bloomberg Cmdty TR ETN
SPDR S&P Oil & Gas Equipment & Svcs ETF
Invesco DB Commodity Tracking
Elements Rogers Intl Cmdty TR ETN
iShares MSCI Turkey ETF
Invesco DB Agriculture
VanEck Vectors Gold Miners
SPDR S&P Metals and Mining ETF
iShares US Oil Equipment & Services ETF
iShares MSCI Brazil Capped ETF
VanEck Vectors Russia ETF
iShares MSCI Italy Capped ETF