How is the data in the Factors section determined? How are the values generated, and where does the data come from?
The data for the Factors section of both our Comparison Tool and our Fund Reports comes from MSCI's Factor Classification Standards (FaCS). Both the FaCS and the Factor Box tool attempt to standardize the way factors are measured and evaluated across the investment industry. You can learn more about the methodology used to determine these scores directly from MSCI.
Do you think VOO and SPY would run afoul of the wash sale rule?
We had a few questions come in about the wash sale rule and what it all means, so I'll just answer them all at once.
The wash sale rule is an IRS rule that forbids you from selling a security, then buying a "substantively similar" one within 30 days. It's designed to prevent investors from selling a given security at a loss, then immediately buying it back to harvest the tax benefit; but it can trip people up when they're trading different but similar securities as well.
It's not always easy to figure out which ETFs are so similar that they'd run afoul of the wash sale rules. In fact, this seems a good time to remind everyone that I am not an investment advisor, I can't offer investment advice, and questions like these would be great to ask a qualified financial advisor!
What factors would indicate the possibility of an ETF closing?
Like you, I wish I had a crystal ball on whether a fund would be likely to close or not. Some billion-dollar ETFs get closed, while some funds with $3 million in assets under management (AUM) linger for years and years.
Generally, however, small ETFs (we're talking $10 million in AUM or less) that have been around for a long time (think three years or more) cost issuers more money to run than they generate. These are usually the ones targeted for closure. Other warning signs include low average volume, high expense ratio relative to its segment, and faddish investment themes that have run their course.
In the case of leveraged/inverse ETNs, we've seen dramatic price drops be a trigger for automatic closures as well (read: "Leveraged ETF Closures Piling Up").
Will the Comparison Tool show which ETFs have options?
No, but you can see that information right on the ETFs' fund report pages. Under the Tradability tab, near the bottom of the right-hand column, you'll see a metric, "Open Interest on ETF Options," which tells you the total number of net outstanding contracts for a given ETF:
Are certain sectors more susceptible to ETFs that have exposure outside the ETF's stated purpose?
This is a great question. So legally, an ETF must contain securities that line up with the investment objective stated in its prospectus. If an ETF's prospectus says it's going to track Index XYZ and its managers start randomly adding in securities that aren't in that index, then the managers can get in big trouble. The lawyers can get called in; it gets ugly.
However, among similarly themed investment objectives, there can sometimes be significant difference of exposure from issuer to issuer, and it's not because the issuers are trying to pull a fast one on you. It's just a difference of interpretation. Especially for thematic or active products, two issuers can come at a given investment concept from completely different angles, leading to portfolio holdings that you might not expect.
For example, I recently looked at differences in two travel and transportation ETFs, the US Global Jets ETF (JETS) and the ETFMG Travel Tech ETF (AWAY). Though these two funds ostensibly track the same fairly narrow theme of travel, there is literally no portfolio overlap between them. That's because the two issuers interpreted the theme in two distinct and novel ways.
Generally speaking, thematic, smart beta and active ETFs tend to have the biggest difference in portfolio exposure from fund to fund and issuer to issuer. But even U.S. large cap funds can have surprises inside. That's why it's always important to look under the hood before you buy!
That's all for now. Remember, if you missed last Thursday's webinar, "Pick This, Not That! How To Compare ETFs," you can now register and watch the on-demand replay at any time.
Contact Lara Crigger at [email protected]