A Visit To The ETF Graveyard

December 21, 2011

The recent rash of fund closures has probably left many investors wondering which ETFs are next.

After all, Ron Rowland's ETF Deathwatch points to 242 ETFs that are apparently headed for destruction, with 35 products added to his list in the first two weeks of December alone.

Matt Hougan wrote about measuring ETF closure risk back in January. He pointed out that there are seven major predictors of whether a fund will close:

  • Assets Under Management
  • Trading Volume
  • Bid-Ask Spread
  • Competitive Landscape
  • Issuer Strength
  • Time Since Launch
  • Corporate Actions (i.e., M&A)

So let's look at the most recent fund closures and see if they make sense within our framework.

Global X Funds

The most recent announcement came from Global X, which announced on Tuesday that it would be closing eight ETFs in February.

These eight ETFs include are:

  • Global X Mexico Small-Cap ETF (NYSEArca: MEXS)
  • Global X Oil Equities ETF (NYSEArca: XOIL)
  • Global X Farming ETF (NYSEArca: BARN)
  • Global X Fishing Industry ETF (NYSEArca: FISN)
  • Global X Food ETF (NYSEArca: EATX)
  • Global X Waste Management ETF (NYSEArca: WSTE)
  • Global X Russell Emerging Markets Growth ETF (NYSEArca: EMGX)
  • Global X Russell Emerging Markets Value ETF (NYSEArca: EMVX)

All eight of these ETFs were launched in the first half of 2011, making them new funds that have passed the six-month incubation period.

As the table below shows, each ETF had less than $3 million in AUM – far from the generally accepted $30 million threshold. In addition, trading volumes have been low and bid-ask spreads high, further indicating a lack of interest among investors.

Ticker Launch Date AUM Average Daily Dollar
Trading Volume
Bid-Ask Spread
MEXS 5/4/2011 550,000 9,592 5.50%
WSTE 4/12/2011 1,170,000 19,634 0.99%
FISN 5/3/2011 1,554,000 12,683 1.28%
EMGX 1/25/2011 1,977,000 13,250 2.16%
EMVX 1/25/2011 2,114,000 17,044 1.93%
BARN 6/1/2011 2,576,000 40,334 0.80%
XOIL 3/14/2011 2,616,000 61,529 1.67%
EATX 5/2/2011 2,932,000 55,675 1.27%

Another factor that comes into play for BARN in particular is the competitive segment it was launched into – its nearest competitor, the Market Vectors Agribusiness ETF (NYSEArca: MOO), has effectively captured the market with its $5.5 billion AUM. In comparison, BARN's $2.6 million looks paltry indeed.

Notable Global X funds that weren't closed -- yet look to be on the cusp based on the above-mentioned closures -- include the Global X Aluminum (NYSEArca: ALUM), Global X S&P/TSX Venture 30 Canada (NYSEArca: TSXV), and Global X Auto (NYSEArca: VROM) ETFs.

Ticker Launch Date AUM Average Daily Dollar
Trading Volume
Bid-Ask Spread
TSXV 3/16/2011 2,412,500 38,290 0.97%
ALUM 1/4/2011 2,736,000 52,339 1.73%
VROM 5/18/2011 3,453,000 29,200 1.52%

IndexIQ Funds

On Monday of this week, IndexIQ announced that it would be closing three of its ETFs on Friday, Dec. 23. Those are:

  • IndexIQ Taiwan Small Cap ETF (NYSEArca: TWON)
  • IndexIQ Hong Kong Small Cap ETF (NYSEArca: HKK)
  • IndexIQ Japan Mid Cap ETF (NYSEArca: RSUN)

As the table below shows, like the Global X funds, the IndexIQ ETFs have all barely lived past their six-month birthdays. Their assets under management are all unprofitably low, and the trading volumes and bid-ask spreads don't indicate much interest.

Ticker Launch Date AUM Average Daily Dollar
Trading Volume
Bid-Ask Spread
HKK 5/17/2011 1,346,585 26,452 1.23%
RSUN 6/2/2011 1,840,036 11,259 1.23%
TWON 5/19/2010 1,982,558 42,003 0.82%

Although IndexIQ's funds were all unchallenged in their segments, investor interest simply hasn't been there.

It's possible that, in another economy, HKK, RSUN, and TWON would have been popular and profitable, but IndexIQ is simply not a big enough company to keep low-asset funds going indefinitely – further indication that the issuer's market position is important.

Other IndexIQ funds that look to be in precarious situations, but that haven't been closed, include the IndexIQ Global Oil Small Cap ETF (NYSEArca: IOIL) and the IndexIQ Emerging Markets Mid Cap ETF (NYSEArca: EMER) ETFs.

Both have similarly disappointing figures, making them good candidates for fund closure if their assets don't pick up.

Ticker Launch Date AUM Average Daily Dollar
Trading Volume
Bid-Ask Spread
EMER 7/12/2011 1,451,755 27,089 1.85%
IOIL 5/4/2011 1,542,576 22,180 1.37%

It shouldn't be surprising that, with the markets in disarray, investors are more hesitant to invest in new niche products – especially those that are inherently risky. In the relatively calm first six months of 2011, not a single ETF closed, while 30 have closed in the latter six months -- 38 if you count the eight forthcoming closures from Global X.

As Matt wrote in January, there are three potential consequences of fund closures:

  • Tax consequences: when a fund closes, you're effectively forced to sell your position, which could result in capital gains (in addition to the hassle of having to find a new vehicle for your desired exposure). In addition, the fund may pass on capital gains on its portfolio that it wasn't able to manage away.
  • Closing costs: generally, when a fund closes, its issuer assumes all closing costs. However, on occasion, investors may be saddled with them.
  • The embarrassment of having to explain to a client that the fund you picked was so unpopular that it had to be shut down.

With the markets in turmoil and new funds launching daily, it's likely that the fund closure trend will continue. While the consequences aren't devastating, they can be annoying, so keep an eye on your portfolio.

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