August marked a strong month for the survival of exchanged traded products, with no ETP closures and a shorter Liquidation Watch List going into the month of September. The 41 closures thus far in 2013 are lagging last year’s record of 96, leaving the approximately 1,500 surviving ETPs struggling for a share of the $1.5 trillion market. More than 40 percent of those assets reside in the 20 largest products, and more than three-fourths are held by the top 100.
As sponsors face their fourth quarters, many could improve margins by joining the consolidation trend. The bulk of last year’s record closings happened in the second half when a few sponsors undertook wholesale pruning of their offerings, so do not be lulled by the recent spate of inactivity. Fund closures can carry unwelcome circumstances especially with those exposed to thinly traded markets.
The monthly ETF Global Liquidation Watch List, found on WealthManagement.com and ETF Global's website, quantifies all exchange traded products that hold below $5 million in AUM, have existed for at least two years and had negative performance for the trailing 12 months. This month’s list includes 76 listed names that fit these criteria.
The 30 equity products on the September list include several inverse and leveraged ETNs but mostly traditional ETFs subject to the Investment Company Act of 1940. Authorized participants lose interest in providing liquidity for a fund that is closing, which can result in widening spreads and tracking errors. Many thinly traded markets can also react adversely to even a small fund liquidating its positions.
When ETNs liquidate, they pay the exact value according to the index they track but a constant flow of redemptions into an illiquid market can wreak havoc on an index. The 28 commodity products are almost all ETNs not subject to the stringent requirements of the 1940 Act and with plenty of fine print in their creative prospectuses. Keeping it simple can avoid a lot of problems, so try to avoid the almost one in five commodity products that appear on this month’s list.
Almost 20 percent of all currency funds also appear, mostly leveraged products. If you need to hedge, there are plenty of others with the heft to sustain volatile periods. If you hedge with any of the four inverse fixed income funds, make sure your hedge isn’t holding too much risk. The six multi-asset funds have even higher ETFG Risk Ratings, so know what you are buying. If you want big leveraged action, casinos can be fun too.