I am a strong advocate in Exchange Traded Funds (ETFs). They are the lowest cost, most tax efficient vehicle on the market today. However, you need to really understand the ETF you use. Not all of them are good.
One case is the leveraged ETFs. These vehicles are set up to provide double or even triple the returns of the underlying index. There are leveraged ETFs that go up when the market rises and ones that rise when the market falls. But, I find most investors, and even a surprising number of advisors, think that these vehicles track the index on an annual basis. This means if the market is up 10% for the year then the double long ETF would be up 20%. Or, the double short ETF would be down 20%.
These vehicles do not track the index over an extended period like a year. They track the market movements on a day by day basis. This means that if the market is up 10% for the year that investors may not get the 20% upside in the double long ETF. They may get more or less because this vehicle is compounded daily.
Rather than spend too much time explaining this, here is a great article from my friend Steve Goldberg of Kiplinger’s: http://www.kiplinger.com/columns/value/archive/2009/va0414.htm. Besides, Steve is a much better writer than I am anyway.