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.

 

Apples And Oranges

While the time difference may seem like a small thing, consider that more liquid ETFs on the top-gainers and -losers lists really do reflect moves in overnight prices, since their last price is likely set at the market close. That means the price comparison isn't an apples-to-apples measurement when less liquid ETFs are in the mix.

This phenomenon isn't confined to a one-day lag. Some ETFs go for days without trading, and their last prices can get extremely stale and misleading.

Lastly, performance snapshots for any time period—a month, a year or more—that rely on last price can capture this unwanted effect.

What To Do

The most foolproof way to check for a stale price is to look for the time of the trade on the previous day—or at the start of whatever period you need to accurately establish its changing value.

Those without access to a Bloomberg machine or similar providers can still get a feel for the ETF's liquidity from free sources. An ETF that trades $10 million a day won't have this problem, but one that trades $10,000 a day might.

Typical daily volume for every ETF can be found on ETF.com. Sites like Yahoo Finance list the trading volume day by day. A fund with 100 shares traded for the whole day offers small likelihood that the transaction occurred at 4 p.m. Eastern. Other red flags: extremely wide spreads—as in greater than 1.00 percent or very low assets under management: say, less than $10 million.

Alternatively, you can ignore price altogether and measure performance with the fund's fair value or its net asset value (NAV). Many ETF issuers publish daily NAV series.

Bottom Line

The irony here is that funds flagged as the day's biggest movers are often the sleepiest traders in the ETF realm.

ETFs are great, but savvy investors arm themselves with basic tools on how trading impacts both realized and reported performance.


At the time this article was written, the author held no positions in the security mentioned. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.

 

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