Survival of the Fittest ETFs

August 23, 2012

Exchange traded funds (ETFs) continue to be a growing part of the mutual fund industry. The Investment Company Institute (ICI) reports that ETF assets rose 8% over the past year ending June 30, 2012, while assets in mutual funds rose just 1.7%. But not all ETFs attract sufficient assets.

Nearly 50 ETFs were liquidated in August 2012 (according to the ICI, 15 ETFs were liquidated in all of 2011): Russell Investments liquidated 25 ETFs, Scottrade’s FocusShares liquidated 15 ETFs, and Direxion closed 9 ETFs. Each ETF provider offered the same reason: lack of assets.  In a special report on ETFs last month, Barron’s reported that “more than half the ETFs on the market today have less than $50 million in assets, putting them in the “maybe” category as to whether they’re viable products their sponsors will keep around.”

These recent closures may prompt others to be more selective about ETFs. An August 17, 2012 Marketwatch piece “Some advisers shun small ETFs, fearing closures” interviewed investment advisors who avoid smaller ETFs or those with a spotty trading history.

Shareholders aren’t left empty-handed when an ETF is liquidated, as the MarketWatch article explains. “Funds that do decide to liquidate follow an orderly process, with the ETF provider notifying shareholders of the date they will stop trading and date of liquidation. At liquidation, investors generally receive the fund’s per-share trading value, but there are costs that can eat away at that final payout.”

We are choosy about the ETFs we list in NoLoad FundX. We list only ETFs that have a decent amount of assets and solid trading volume, and none of the FocusShares, Direxion or Russell ETFs met our criteria.  Our ETF listings are not static.  We periodically screen the ETFs in NoLoad FundX and remove those whose size or liquidity no longer meet our standards.  We want our readers to be confident that, after buying shares of an ETF listed in our newsletter, they will be able to achieve a fair price when they inevitably go to sell those shares.

There are plenty of ETFs that meet our criteria for size and liquidity (we cover over 250 ETFs). Currently, ETFs like iShares High Dividend Equity (HDV), Powershares QQQ (QQQ), and  SPDR S&P Homebuilders ( XHB) are among the top ranked funds.

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