I listen to a lot of investment podcasts, and one of the ones I enjoy the most is Trillions, produced by Bloomberg. It stars two journalists, Joel Weber and Eric Balchunas (pronounced bal-chew-ness, as best I can tell), and a few other rotating cast members.

I enjoy listening because the hosts are Generation Xers (like myself), who are funny and down to earth. They feel like friends who talk in depth about exchange-traded funds (ETFs). I once met Balchunas at a conference and thought he was fun to hang around with. It didn’t hurt that I told him I read his book.

Last week, they discussed the good, the bad, and the ugly ETFs in the market today, but mostly the ugly, which they refer to as hot sauce (am I mixing metaphors?).

We’ve been investing in ETFs since the beginning, and in recent years, I’ve been amazed by the complexity of products being created. When we started with ETFs, there were only a few hundred, and you couldn’t get ‘exotic’ asset classes like emerging markets stocks or … bonds. That’s not very exotic; we didn’t have the basics then.

The innovation was fun and engaging for a while, and I looked most months at what was coming to see if they might make sense for clients. I stopped looking several years ago because innovation turned into a frenzied race to throw spaghetti at the wall and see what sticks.

Here are a few of the current flavors of hot sauce (that will likely end badly for most investors).

Private equity or credit in an ETF structure.

We haven’t jumped on the private markets bandwagon, but I won’t rule it out if they make sense. Private markets are inherently illiquid, and that’s okay. It may be one reason for expecting higher returns from private assets.

At least two ETFs now offer private securities in the ETF structure. It seems to solve a problem: Who doesn’t want higher expected returns without giving up any liquidity? No one! Is it possible? I doubt it.

That’s a mismatch because the ETF is perfectly liquid, but its underlying investments aren’t. At some point, there will likely be a supply/demand imbalance that creates downward price pressure on the ETF.

That pressure may pass, and it may be that the good times will more than offset the bad times, but it hardly seems like a reasonable risk to take. If you want private investments, buy them in the proper structure and live with the illiquidity. You know in your heart that you can’t have your cake and eat it too.

Concentrated Leverage

Leveraged ETFs have existed for over a decade, but the current ‘innovation’ is leveraged exposure to a single stock.

My favorite is the Defiance 2x Long exposure to Microstrategy, a tech company that converted its balance sheet to Bitcoin a few years ago. As Bitcoin rose, Microstrategy proved to be a leveraged bet on Bitcoin, especially once it started issuing convertible bonds to buy more Bitcoin.

The Defiance product launched last August, and by the end of the year, it was up 143.6 percent, which was better than Microstrategy and the S&P 500, which ‘only’ made 119.5 and 6.6 percent during that time.

This year hasn’t been kind so far. The overall market is down -4.8 percent, but Miscrostregy stock is down less than a percent. So, the leveraged ETF is down two percent, right? Nope, it’s down -26.0 percent.

I’m skimming over many details, but leveraged products are usually designed to give you double exposure for one day, and high volatility acts as a drag on returns (sometimes called the variance drain).

That’s how a product that says 2x in the name can go down 26x more than the stock in less than 90 days.

Impossible Yields*

After losing that much on a leveraged ETF, you may want to find a ‘safer’ way to get exposure to Microstrategy. One ETF offers exposure to Microstrategy, but it has a yield** of 88.1 percent, according to the sponsor’s website.

This ETF is loaded with bundles of options that seek to generate monthly income by selling or writing call options on Microstrategy stock. The website quotes a ‘distribution rate’ of 88.1 percent, and clearly indicates with asterisks that the distribution rate is not a yield, but people read it as a yield anyway.

Balchunas talks about presenting at a conference with retail investors who yawned at his presentation until he showed this ETF, and then scores of people wanted the ‘ETF with the 88 percent yield.’

This ETF gained 207.8 percent while it was live last year (it launched in February), while Microstrategy gained 306.1 percent. The cost of those options was a material drag on the total return, but the distribution was high: the price only gained 24 percent, and the distribution did the rest.

These options are still a drag this year, but not as much as last year. So far, the ETF is down -3.1 percent, versus flat for the underlying stock.

Thanks to the options, the ETF is less volatile than the stock. And you’re getting much of your money back through the distributions. My point is that most people misunderstand what they are getting since it isn’t a massive yield.

These are just three examples of hot sauce available today in ETFs. While I like some heat in my food and portfolio, these are beyond the pale and should probably be avoided.