Tuesday, February 12, 2013

With all our focus on risk lately, let’s take a look at the risk of a fund closing.  When that happens, the Authorized Participants who create and redeem shares look elsewhere to capture tracking error.  Tight tracking error is one of the more attractive aspects of ETFs so you don’t want to be in one without it.

Our publically available Liquidation Watch List helps you avoid those funds that exhibit characteristics that make them more likely to close.  Most sponsors will give a fund at least two years to meet its goals so we screen out all those younger than that threshold.  That leaves us with 1,067 exchange traded products of various structures to screen for the second two criteria.  268 products have less than $5 million in Assets Under Management which is an amount that makes it difficult for a sponsor to meet the obligations of running a public product.  The public tends to stay away from those products with negative trailing twelve month performance which can be the last straw before a sponsor pulls the plug, 238 products meet that criteria this month.  Looking at the intersections, 37 products meet all three criteria and comprise February’s list.

A quick glance at the spreadsheet shows most are esoteric products such as leveraged and inverse funds whose prospectuses mostly warn against holding as investments. our models have been favoring lower risk names and while only one this month gets scored in Quant, they all get Red Diamond Risk Ratings and the group averages slightly over 7 red diamonds. So if you are looking at the higher risk products in the ETP market, check their ETFG Red Diamond Risk Rating and make sure they are not on the Liquidation Watch List. Thanks for reading, tomorrow we'll go back to the funds you want to buy. 

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