The ETF Deathwatch: Funds on the Brink

In a recent SmartMoney article, “ETF Report Card: Bullishly Treading Water,” Will Swarts notes that while ETFs as an investing instrument are growing in popularity, the ETF business is getting a lot more competitive.  That means some funds “will be left by the wayside.”

Swarts talked to Ron Rowland, who runs an “ETF Deathwatch” site. Here’s Rowland’s July 2010 report on the ETFs he’s tracking because of low volume and poor liquidity.

He has 133 funds on that list. Here are some examples:

Rydex S&P Equal Weight Utilities ETF (RYU). This fund was launched more than three years ago to “replicate the S&P Equal Weight Index Telecommunication Services & Utilities.”

If you’d bought 100 shares on July 13, you were the only one who bought shares that day. And I know exactly what you paid – $46.50 because that’s the open, high, low, and close for the day. Over the past 3 months, the maximum volume was only 15,700. Some days have zero volume.

SPDR S&P International Consumer Discretionary Sector ETF (IPD). This two-year old fund tracks an index of non-US consumer discretionary stocks.

The average volume over the past three months is under 5,000 shares. It also has its occasional lonely zero-volume days.

Low volume generally means extremely wide bid/ask spreads – making it difficult for any investor to manage risk. You would surely want to think twice before putting in a market order for a security like that, since your order would literally be “the market.”

To put things into another perspective: Buying even just 1% of the average three month daily volume of a stock or ETF is comparable to buying 8 million shares of Citigroup (C), 1 million shares of Ford (F), or 2.8 million shares of the S&P 500 ETF (SPY).

Destined for deathwatch?

Rowland says he gives a fund six months to gain traction before he considers it for his deathwatch. But that doesn’t mean it’s a good idea to buy into a new ETF.

Here are a few new ETFs that aren’t on Rowland’s list – at least not yet.

The OneFund (ONEF): According to its website, The OneFund “is a simple and easy way to own a globally diversified, professionally managed stock portfolio in a single fund.”

That sounds convenient. But since the fund launched on May 11, its highest daily volume has only been 24,200 shares – and that was on May 11! This may indeed be a diversified fund, but it certainly lacks liquidity.

First Trust BICK Index (BICK): I didn’t even know there was a “BICK Index,” but according to First Trust Portfolios, this ETF tracks the ISE BICK Index of “the largest and most liquid public companies that are domiciled in Brazil, India, Mainland China and South Korea.”

So BICK is BRIC minus Russia plus South Korea. Since its inception on April 12, the fund traded an average of about 12,000 shares per day. It’s your decision, of course, but perhaps four higher-volume ETFs (one for each country) might be a another approach to consider, even when you account for the higher commissions you may incur.

The Zecco ETF Screener can help you select funds based on your investment goals. But before you invest, do yourself a favor and check the volume. Consistent light trading could mean the fund is on its way to the “ETF deathwatch.”

Important Note
Investors should consider the investment objectives, risks, and charges and expenses of a mutual fund or ETF carefully before investing. A mutual fund/ETF’s prospectus contains this and other information, and should be read carefully before investing. To obtain a prospectus, contact the fund or email us at customerservice@zeccotrading.com.