Thursday, June 13, 2013

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

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.

Inclusion on the ETFGsm Liquidation Watch List does not guarantee closure and exclusion does not guarantee longevity but as risk has come back into focus lately, liquidation risk is worth considering.  If you own niche products that appear on the list, check the ETFGsm Scanner for stronger products with similar exposure.  Thanks for reading and try to stay dry today.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.