ETF Deathwatch For October 2013: OFF Goes On The List

etfs etfsRon Rowland: Fourteen ETPs joined the ETF Deathwatch and seven made an exit.  The membership roll now stands at 339 (228 ETFs and 111 ETNs).  The net increase of seven marks the second month in a row of list growth, increasing the probability that the one-year old improvement trend is nearing its end.

One of the additions this month is the ETRACS Fisher-Gartman Risk Off ETN (OFF), launched in November 2011.  My initial review warned, “The index composition appears highly optimized for market conditions during the backtest period.”  The definition of what traders and investors consider “risky assets” changes over time, and this ETN, and its Risk On counterpart (ONN), have no ability to change with the times.  This past week was an excellent example, when supposedly “risk-free” T-Bills suddenly became a risky asset.

Products on ETF Deathwatch have an average age of 38.8 months, which suggests many sponsors are erring on the side of patience when it comes to the tough decision of closure.  However, sometimes sponsors can no longer justify the continuing unprofitable situation and closure becomes inevitable.  In many instances, that realization arrives quickly.  More than 25% (93 out of 369) of delisted ETPs fail to make it to their first birthday.

The average asset level of the funds on ETF Deathwatch is just $6.5 million.  If you assume an expense ratio of 0.75%, then they are averaging less than $50,000 in annual revenue.  BlackRock (BLK) recently closed the iShares Diversified Alternative Trust (former ticker ALT), an ETF with more than $56 million in assets and a 0.95% expense ratio.  There were probably many factors involved in the decision, but somehow the $532,000 in annual revenue was not enough for BlackRock.

Owning a product that closes is not a disaster – it’s more of an inconvenience.  If you learn about the closure before its delisting, you can sell your shares on the open market and avoid many potential problems.  The real danger of the funds on this list is their illiquidity.  Trading is sporadic, is often at an extremely wide bid/ask spread, typically has little depth on the bids, and the lack of volume makes meaningful price arbitration nearly impossible.

On the last day of September, 157 of the 1,509 listed ETPs did not trade.  In other words, more than 10% were of zero interest to either traders or investors.  Seven products went the entire month without any trades, and iPath Short Enhanced MSCI Emerging Markets ETN (EMSA) is still awaiting its first trade of 2013. 

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