ENLARGE

Christophe Vorlet for The Wall Street Journal

For example, you could invest $10,000 in the oldest ETF, the SPDR S&P 500, with no upfront commission, an annual management fee of just $9 and virtually no taxable capital-gain distributions. The shares traded this week within 0.01% of their underlying value.

Dave Nadig, director of research at IndexUniverse, a firm that follows the industry, says many of these outlier products are antithetical to the original core mission of ETFs.

WSJs Intelligent Investor, Jason Zweig, visits Mean Street to discuss the career of PRIMECAP Management co-founder Howard Schlow, seen by many as an active fund manager. Zweig and Evan Newmark discuss the benefits of active fund management. Photo: Vanguard PRIMECAP Core.

Six out of the eight exchange-traded products that charge annual expenses of 2% or more are ETNs, according to XTF.com. Put more simply, the cost of owning them is more than 20 times greater than owning the SPDR S&P 500 ETF.

But even those reported expenses, high as they sound, might understate the costs.

For a conventional mutual fund and for most ETFs, expenses are among the first and most prominent disclosures in the prospectus. But ETNs, which generally are structured as borrowings by investment banks, are regulated like bonds, not like the mutual funds many investors seem to mistake them for. These fee structures can be extremely opaque, says Samuel Lee, an analyst at Morningstar, the research firm.

Take the six Etracs Daily Short S&P 500 VIX Futures ETNs, which report that their tracking fee, or annual charge for running the portfolios, is 1.35%.

That is only the beginning. Investors also must cover the manager’s fixed hedging costs of 0.077% a week, which push total expenses up to an effective annual rate of 5.35%. People familiar with the funds say they appear to be used almost exclusively by sophisticated players who buy for the potential of explosive short-term gain. The prospectus warns that these securities are designed for traders and are not intended to be a ‘buy-and-hold’ investment.

Or consider the Credit Suisse Long/Short Index ETN, which seeks to replicate the returns of certain hedge-fund strategies. The front page of the prospectus reports the ETN’s annual investor fee as 0.45%. Not until page 30 of the 84-page document can investors determine that they also will incur an accrued holding rate of 0.7% (adjusted quarterly) and an accrued index adjustment factor fee of 0.5%—implying a total annual cost of 1.65%, or more than triple the reported fee. A person familiar with the matter says that all of this ETN’s costs are disclosed, while traditional mutual funds often rack up substantial trading costs that reduce total return but aren’t reported as separate expenses.

High management fees aren’t the only way these instruments can raise investors’ costs. According to XTF.com, eight ETNs were trading at premiums of 5% or more this week. In one extreme example, to buy $100 worth of assets at iPath Dow Jones-UBS Natural Gas ETN, you would have had to pay up to $196. A spokeswoman at iPath declined to comment.

As for tax efficiency, consider the 2XLeveraged Long Etracs Linked to the Wells Fargo Business Development Company Index (yes, that is the name of this $39 million ETN). An individual who invested directly in one or more business-development companies and received income from them could be taxed on a portion of it at preferential rates of 15% or lower. But, warns the prospectus, any income paid out by this ETN is taxable as ordinary income, at rates up to 35%. Investors who want enhanced yield may be willing to forego some tax advantages, says a person familiar with the ETN.

When it comes to expenses, I consider all ETNs to be suspect unless you’ve combed through every page of the prospectus, says Mr. Lee of Morningstar.

My advice: Don’t even try that unless you have a couple of hours, a magnifying glass, a financial calculator and a few pints of strong coffee. If a financial adviser tries to sell you an ETN, say simply: Tell me what page 43 of the prospectus means.

There is a buyer for every Frankenfund—but it doesn’t have to be you.