Ron Rowland: Twenty-one products joined ETF Deathwatch for October. Nine former members were put to rest during September and two escaped due to improved health. The count now stands at 335 (240 ETFs and 95 ETNs), which represents more than 20% of the ETFs and ETNs that have been on the market for more than six months. The Zombie ETFs are among us.
The average product on this list has $6.3 million in assets and an average expense ratio of 0.70%. This implies the average product on ETF Deathwatch generates just $44,100 per year in total revenue. After paying the fund manager, listing and distribution expenses, and compliance and administrative costs, it is easy to see that the ETFs and ETNs on this list probably do not generate any profit for their sponsors.
Products that are being subsidized cannot live forever. Unless the sponsoring firm has a solid strategic reason for absorbing the losses year after year, the board will (or should) eventually close and liquidate the fund to stop the bleeding. The timing of these closures is difficult to predict because some sponsors remain optimistic that their struggling funds will turn profitable one day, while others have pulled the plug in fewer than seven months. Please refer to Five Steps to Avoid Disaster When Your ETF Closes if a fund you own announces its closure.
While the prospect of closure is often reason enough to avoid these funds, the more pressing reason is the lack of liquidity. A staggering 322 of the 335 products (96%) on ETF Deathwatch had at least one day of zero volume during the 50 trading days ending September 30. The average number of zero volume days for products on the list is 21.3 out of the past 50. In other words, these ETFs do not trade on 42% of the days that the market is open.
If you own one of these Zombie ETFs, who is going to buy it from you when you are ready to sell? Another problem with low volume ETFs and ETNs is that keeping the trading price aligned with their underlying net asset value (“NAV”) becomes much more difficult. The creation and redemption mechanism that keeps the trading price of ETFs close to their NAVs typically requires 50,000 shares. The average ETF on this list only trades about 1,000 shares per day, so building a creation-redemption block would require more than two months of trading volume. Good luck trying to find a buyer at a fair price.
The average asset level of products on ETF Deathwatch dropped from $6.8 million to $6.3 million, and the quantity of products with less than $2 million jumped from 62 to 76. The average age decreased from 50.1 to 48.8 months, and the number of products more than five years old increased by four to 114.
Here is the Complete List of 335 Products on ETF Deathwatch for October 2015 compiled using the objective ETF Deathwatch Criteria.
The 21 ETPs added to ETF Deathwatch for October:
- AdvisorShares STAR Global Buy-Write (VEGA)
- BLDRS Asia 50 ADR (ADRA)
- DB 3x Long 25+ Year Treasury Bond ETN (LBND)
- DB Inverse Japanese Gov’t Bond Futures ETN (JGBS)
- Deutsche X-trackers Emerging Markets Bond Interest Hedged (EMIH)
- Deutsche X-trackers High Yield Corporate Interest Hedged (HYIH)
- Deutsche X-trackers Investment Grade Bond Interest Hedged (IGIH)
- Direxion Value Line Conservative Equity (VLLV)
- Direxion Value Line Mid-Large-Cap High Dividend (VLML)
- Direxion Value Line Small-Mid-Cap High Dividend (VLSM)
- ETRACS Alerian Natural Gas MLP ETN (MLPG)
- Global X SuperDividend Emerging Markets (SDEM)
- Global X SuperDividend REIT (SRET)
- IQ Hedge Event-Driven Tracker ETF (QED)
- IQ Hedge Long/Short Tracker ETF (QLS)
- iShares iBonds Dec 2023 Corporate (IBDO)
- iShares iBonds Dec 2024 Corporate (IBDP)
- iShares iBonds Dec 2025 Corporate (IBDQ)
- Lattice Global Small Cap Strategy ETF (ROGS)
- Validea Market Legends ETF (VALX)
- WisdomTree Europe Quality Dividend Growth (EUDG)
The 2 ETPs removed from ETF Deathwatch due to improved health:
- SPDR MFS Systematic Growth Equity (SYG)
- WisdomTree Japan Hedged Health Care (DXJH)
The 9 ETPs removed from ETF Deathwatch due to delisting:
- Deutsche X-trackers Regulated Utilities (UTLT)
- Deutsche X-trackers Solactive Investment Grade Subordinated Debt (SUBD)
- ProShares UltraShort Telecommunications (TLL)
- Market Vectors MSCI Emerging Markets Quality (QEM)
- Market Vectors MSCI Emerging Markets Quality Dividend (QDEM)
- Market Vectors MSCI International Quality (QXUS)
- Market Vectors MSCI International Quality Dividend (QDXU)
- PIMCO 3-7 Year U.S. Treasury Index ETF (FIVZ)
- PIMCO Foreign Currency Strategy Active (FORX)
This article is brought to you courtesy of Ron Rowland from Invest With an Edge.