Red skies in the morning, sailors take warning. Things are looking red this morning as
investors worldwide are remembering risk, central banks notwithstanding. One risk of ETF investing is that a fund
closes and experiences wide swings in its final days. The ETFGsm Liquidation Watch List
is meant to keep you out of those funds with the most risk of closing. It can be found under the Analytics button
and is covered in a monthly column we write at Wealthmanagement.com.
June’s list contains 71 products that have existed for at least
two years, hold less than $5 million in assets and have negative performance for
the trailing twelve months. 71 is a high
number as is the 40 funds that have already closed in 2013. Many of the listed funds are niche products
and almost half of them are ETNs. When an ETN closes, deviations from NAV are not much of a concern
because holders will receive their fair value based on the index the product
tracks. But that is where problems can arise. Many products track indices that
exist solely for those products and as offerings have become more niche and
complex, so have the indices, which can complicate an unwinding. Sponsors have become more creative in
structuring indices to deal with liquidity constraints in the markets they
track so a final liquidation value may not resemble the spot market price.
Only five funds
on this month’s Liquidation Watch List are equity ETFs: three Chinese sector funds, one broad market
Columbia fund and an all world ex-U.S. materials sector fund. Their average
Green Diamond Reward Rating is a low 5.73.
The other 20 equity products are leveraged, inverse or ETNs. Seventeen
of them are ProShares short funds, some of which have barely $1 million under
management. If you would be reluctant to allocate to a manager with that amount
in a strategy, maybe you should also be reluctant to purchase a public vehicle
that small.
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