Tuesday, January 15, 2013

There is very little change in Quant’s rankings today so let’s take a look at the ETFG Liquidation Watch List.  This is where we try to alert you to funds that have a higher likelihood of closing.  When a fund announces a closure, the Authorized Participants usually stop engaging in their arbitrage activities which can lead to spikes in tracking error, something you don’t want to be around for.

We begin by screening for all funds with assets under management below $5 million which is a level that makes it difficult to generate the fees necessary to operate and market an Exchange Traded Product.  This month’s list shows 253 products meeting that criterion.  Most sponsors will give a new product some time to gather the necessary assets so we screen out all those funds that have been around for 2 years or less which amounts to 1,051 products this month.  Even though Quant will highlight an occasional loser as worth buying, most investors shy away from the biggest loser list and sponsors know that a negative trailing 12 month performance will keep their funds off of those buy lists.  Our final screen this month shows 323 products with negative performance over the past year.  When we Venn diagram the whole thing out we get 38 products that meet all three criteria.

This month’s list, which you can see under the Analytics button, has 9 commodity funds, 4 currency, 2 multi asset and 23 equity based funds which are mostly leveraged or inverse.  No fixed income this month.  If you like to buy Quant’s top rankers, rest easy as the highest Quant score on the list is a lowly 57.1 out of the 4 funds with scores (Quant only scores standard equity ETFs).  If you like to limit your risk exposure, you probably don’t need to worry either as the average Red Diamond Risk Ratings of this month’s list is a high 6.89 with the lowest being 4.56 on a South African currency fund.  That may not seem very high but currency funds tend to have lower Risk Ratings. 

So if you stick with funds that get high Green Diamond Reward Ratings and low Red Diamond Risk Ratings you don’t need to worry.  But if you like to dabble in some of the more esoteric products available across the landscape, make sure you consult the ETFG Liquidation Watch List prior to purchase or to check up on any positions you currently own.  Inclusion on the list doesn’t guarantee closure and exclusion doesn’t guarantee longevity but our users have found it to be an important component in their toolbox.  Thank you for filling your toolbox with ETFG tools, we’ll be back with Quant’s latest rankings tomorrow.

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