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A week ago we celebrated Thanksgiving in the U.S. I hope you had a great time with your loved ones. Now families from coast to coast are dealing with the inevitable leftovers.
The good news is that the extra food provides an opportunity to be creative. You can …
• Create innovative new foods with your leftover feast: Turkey casseroles, enchiladas, pizza, soup, even desserts.
• Start a family tradition. Plant a tree every Thanksgiving, using your composted excess as fertilizer.
• Take your extra food to a recycling plant that will turn it into pellets for generating electricity.
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| Turkey goes in, power comes out. |
Can We Recycle
Extra ETFs, Too?
I’m second to no one in my appetite for exchange traded funds (ETFs) … but even I have to admit that the industry can get a little gluttonous. How many ETFs do we really need?
A lot, apparently. As of this week, U.S. investors can choose from 1,374 listed ETFs and ETNs. And back in October, I introduced you to some of these new neighbors in The Grand Parade of New ETFs.
This total includes …
- 18 large cap growth funds,
- 91 U.S. large cap funds,
- 50 technology sector funds,
- 54 U.S. Treasury funds,
- 30 VIX funds,
- 28 precious metals funds, and
- 79 energy-related funds.
I believe choice and competition ultimately work to the benefit of investors. But just like your leftover turkey, these duplicative ETFs won’t last forever. Some will need to be recycled.
ETFs Don’t Stay Fresh
in the Freezer
Every month my ETF Deathwatch keeps a running total of endangered ETFs. Some sponsors have told me, in no uncertain terms, that they don’t appreciate the “honor” of making my list.
I’m sorry if their marketing plans aren’t working, but I compile the Deathwatch list using totally objective criteria. My personal preferences don’t matter. Here are the rules:
First, I exclude all ETFs and ETNs launched within the last six months. Even good funds need a little time to gain attention.
Second, I take out any ETFs with assets greater than $25 million in either of the last two months. These are big enough to survive on their own.
The final Deathwatch list is composed of any remaining funds that fall into one of the following categories:
- Average daily value traded of less than $100,000 for the last three consecutive months, or
- Assets under management below $5 million for three consecutive months.
I think these rules are quite fair. If you are an ETF sponsor and you can’t attract $5 million, nor convince people to buy and sell $100,000 worth of shares on an average day, then your product is not likely to survive.
Record Number on
ETF Deathwatch
As of October 31, 2011, the Deathwatch list included 154 ETFs and 57 ETNs. I believe this is a direct result of this year’s flurry of new launches — 275 in the first ten months of 2011.
The 211 products on this list have an average age of about 26 months and average assets below $6 million. To my knowledge, sponsors have announced liquidation plans for only a small handful of them.
What happens if you are in an ETF when it liquidates? You’re unlikely to have a total loss, because you’ll get paid your pro-rata share of whatever the portfolio is worth on its closure date.
On the other hand, smart investors will probably have already sold by that point. Whoever is left behind may have to bear the fixed costs of the entire fund — which could be significant. Some sponsors even make the few remaining shareholders cover the costs of actually closing the fund!
Moreover, since closing funds are typically very small with little activity, the market price is easily “gamed” by professionals in those last few days.
You can view the full ETF Deathwatch November 2011 list by clicking here.
If you own an ETF or ETN on the list, should you sell at once? Not necessarily. Quick-strike day traders may be able to profit from some of the ETFs on Deathwatch. But if you’re a long-term investor (and by long-term I mean more than a few weeks), these products are probably not worth the risk.
Stick with the ETFs that will stick with you, which are exactly the kind I seek out for my International ETF Trader members.
Best wishes,
Ron
