Top ETF Gainers And Losers? Not So Fast

August 27, 2014

Movers and shakers in the ETF world are often just the opposite.

I'm a long-term investor, but I like to check the leading and lagging ETFs of the day. It's a helpful barometer of how an ETF reacts to the day's news, and also reflects its general volatility.

The problem: ETFs that trade poorly can produce a distorted snapshot. The reason: Data sources typically rely on the prices of the ETF to determine daily winners and losers, which makes sense, except when those prices aren't current.

The Blurry Rearview

A thinly traded ETF that makes one trade on Monday at 10 a.m. Eastern time and then sits quietly for the rest of that day gets stamped with that 10 a.m. price as its last price. When markets move during the rest of the day, the fund's price just sits there, no longer reflecting the market's consensus of the fund's value.

Fast-forward to the next day—Tuesday—and the fund makes another trade at 10 a.m. The change in price reflects the time between the two trades—in this case, 24 hours—rather than measuring the change in Tuesday morning's price relative to Monday's close.

That's exactly what we saw recently in this top daily losers list from a popular site:

Worst-Performing ETFs 8/26 Intraday Snapshot
Ticker Fund Change %
FUE Elements MLCX Biofuels Total Return ETN -6.75%
DUST Direxion Daily Gold Miners Bear 3X -4.65%
BRZS Direxion Daily Brazil Bear 3x -4.16%
JDUST Direxion Daily Junior Gold Miners Bear 3X -4.11%
GRN iPath Global Carbon ETN -3.93%

Source: Barrons.com; data as of 8/26/14, 10:20 a.m. PT

The Elements MLCX Biofuels Total Return ETN (FUE | F-60) wears the biggest-loser dunce cap on a Tuesday at midmorning—lagging even the leveraged funds that often top the list. The implication is that FUE fell out of bed hard on Tuesday morning.

In fact, the fund hadn't traded since 10:06 a.m. on Monday morning, and the big "overnight loss" reflects almost all of Monday too. Worse, FUE trades so poorly that even its Monday a.m. trade wasn't anywhere close to its fair value, adding a second layer of distortion.

 

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