10 Tiniest ETFs: No Assets? No Problem

June 05, 2013

When it comes to itsy-bitsy ETPs, fewer assets don’t indicate a bad investment.


Assets are a good thing. For exchange-traded products, more is certainly better. But is less necessarily worse?

The short answer is no. The long answer is, well, a longer answer.

In the ETP universe, there live 10 tiny funds. The chart below shows just how “tiny” tiny can be.

10 Smallest ETFs

These funds’ assets under management pale in comparison to giants like the SPDR S&P 500 fund (NYSEArca: SPY), which has nearly $140 billion in assets, or even the fallen-from-grace SPDR Gold ETF (NYSEArca: GLD), with close to $50 billion in assets in spite of the past few months’ massive outflows from the physical gold fund.

The puniest of these exchange-traded products holds just $660,000 in assets. It’s the VelocityShares Daily 2X VIX Mid Term ETN (NYSEArca: TVIZ), and it might surprise you to find out that it’s been around for almost three years.

SPY, on the other hand, is the oldest ETF you can buy. Its $140 billion in AUM also makes it the biggest ETF around. The fund celebrated its 20th birthday in January of this year, and a fund doesn’t become the first to 20 years without doing something very right.

A fund like TVIZ, on the other hand, with just more than $500,000 in assets—a mere sneeze in terms of assets for an exchange-traded product to hold—and the other nine funds on this list of ETP dwarves might cause some folks to ask, What hope do these funds have of staying open?

Plenty. And here’s why.



TVIZ is an exchange-traded note, not an exchange-traded fund. It’s true that ETNs are generally pricier than ETFs.

Additionally, ETN issuers have been hard-pressed to gather assets over the past few years, as less-expensive ETFs offering comprehensive exposure to areas previously inaccessible by any ETP aside from an ETN have hit the market. Similarly, the Lehman ETN meltdown of 2008 left investors wary of the ETN as investment vehicle, according to Ugo Egbunike, senior ETF analyst at IndexUniverse.

However, all of the ETNs on the list launched after the Lehman crisis in September 2008, so they’ve managed to scrape by in what could be considered an undesirable environment.

TVIZ has an expense ratio of 165 basis points, which means it costs $165 per $10,000 invested in the note. At the risk of comparing apples to oranges, the aforementioned SPY costs $9 per $10,000 invested.

All else being equal, even a not-so-savvy investor could look at those numbers and choose SPY over TVIZ. But all things aren’t equal, and investors looking for the leveraged returns that an ETP like TVIZ offers are willing to pay a little more, the logic of which lies in getting more for your increased fees.

The ETPs all have pretty high expense ratios, and a higher ER means less assets to accrue before you turn a profit.

Some of the cheapest funds on the list are the two newest funds: the PureFunds ISE Mining Service fund (NYSEArca: MSXX) and the PureFunds ISE Diamond/Gemstone fund (NYSEArca: GEMS), which both launched Nov. 29, 2012. Both funds cost 69 bps.

MSXX and GEMS carve out a niche corner of the commodity investment universe—they invest in mining services, firms, and companies that mine for precious gems. Even if these two funds don’t have a mountain of assets to boast, they offer exposure to something investors can’t get elsewhere.

In funds years, none of these 10 ETPs is anywhere near SPY status. The oldest product is the ProShares UltraShort Russell MidCap Value fund (NYSEArca: SJL), which has been around for just more than six years and has $917,000 in assets.

SJL is an inverse fund, seeking out negative two-times the daily performance of the index it tracks. Inverse and leverage funds like SJL aren’t meant to be held long term. In fact, doing so can prove catastrophic to a portfolio. That helps explain how a six-year-old fund like SJL, along with TVIZ—a leveraged fund—and the ProShares UltraShort Russell3000 fund (NYSEArca: TWQ), also an inverse fund like SJL, and nearly four years old itself, manage to stay open in spite of puny AUM.

Neither SJL nor TWQ has seen either in- or outflows year-to-date, which may be a red flag. And it has to be acknowledged that some of these funds, like the second-smallest fund, the iPath Global Carbon ETN (NYSEArca: GRN) aren’t the most liquid products.

GRN in particular is subject to violent, albeit phantom, performance spikes and dives, due to the fund’s lack of tradability.

There are a few factors to consider when trying to gauge a fund’s risk of closure, such as how competitive the fund is within its segment. GEMS, for instance, is the only physical diamond ETF available; or how much the fund makes on each dollar invested by charging a hefty expense ratio like TVIZ’s 165 bps.

However, aside from an issuer announcing a fund’s closure, there’s no real formula to deduce which funds will and won’t close, and having small-scale AUM doesn’t seem to be a stamp of doom.


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